Payments in Lieu of Taxes on Federal Real Property

What is ACIR? The Advisory Commission on Intergovernmental Relations (ACIR) was created by the Congress in 1959 to monitor the operation of the American federal system and to recommend improvements. AClR is a permanent national bipartisan body representing the executive and legislative branches of Federal, state, and local government and the public. The Commission is composed of 26 members- nine representing the Federal government, 14 representing state and local government, and three representing the public. The President ap- points 20-three private citizens and three Fed- eral executive officials directly and four governors, three state legislators, four mayors, and three elected county officials from slates nom- inated by the National Governors' Association, the National Conference of State Legislatures, the National League of Cities/U.S. Conference of Mayors, and the National Association of Counties. The three Senators are chosen by the President of the Senate and the three Con- gressmen by the Speaker of the House. Each Commission member serves a two year term and may be reappointed. As a continuing body, the Commission approaches its work by addressing itself to specific issues and problems, the resolution of which would produce improved cooperation among the levels of government and more .effective func- tioning of the federal system. In addition to dealing with the all important functional and structural relationships among the various governments, the Commission has also extensively studied critical stresses currently being placed on traditional governmental taxing practices. One of the long range efforts of the Commission has been to seek ways to improve Federal, state, and local governmental taxing practices and policies to achieve equitable allocation of resources, increased efficiency in collection and administration, and reduced compliance burdens upon the taxpayers. Studies undertaken by the Commission have dealt with subjects as diverse as transportation and as specific as state taxation of out-of-state deposi- tories; as wide ranging as substate regionalism to the more specialized issue of local revenue diversification. In selecting items for the work program, the Commission considers the relative importance and urgency of the problem, its man- ageability from the point of view of finances and staff available to AClR and the extent to which the Commissi6n can make a fruitful contribution toward the solution of the problem. After selecting specific intergovernmental issues for investigation. AClR follows a multistep procedure that assures review and comment by representatives of all points of view, all affected levels of government, technical experts, and interested groups. The Commission then debates each issue and formulates its policy position. Commission findings and recommendations are published and draft bills and executive orders developed to assist in implementing AClR policies.

This report focuses on one of the most dis- acquire $4 billion of private land during the tinctive features of the U.S. system of federal- next 11 years. Accordingly, by examining the ism-the federal government's immunity from issue of the tax status of this federal property, state and local real property taxation. Specifi- the Commission is not only preserving a link to cally it examines whether it is time to modify its past but, in addition, is adhering to its long- or even eliminate the exemption and presents established practice of discussing at an early recommendations to the Congress to authorize stage emerging policy problems that are likely a comprehensive system of payments in lieu of to require remedial legislative action. real property taxes designed to compensate, on Except for a 1970 report of the Public Land a full tax equivalency basis, state and local Law Review Commission, which focused only governments for the revenues lost due to the on the narrow issue of the treatment of certain exemption. "open space" lands (recreation, watershed, na- The call for a rationalization of the current tional park areas), the federal government had system is not new. Public land ownership has not reexamined the payment in lieu of tax issue been an issue of heated debate throughout this since the Kestnbaum report. century. And the Kestnbaum Commission, the The 1976 Payments In Lieu of Tax Act and a "early ACIR," addressed this subject in a 1955 1978 report by this Commission again broke report. The commission recommended that the the ice in this very important area of federal- national government inaugurate a broad system state-local taxation. Responding to P.L. of payments in lieu of property taxes to state 94-565, a general law which provides compen- and local governments as "necessary to help sation to states and localities for National For- preserve financially healthy local govern- est and most other types of underdeveloped ments.'' federal land, the Commission published The Since that time the scope and dimension of Adequacy of Federal Compensation to Local the issues associated with federally owned real Governments for Tax Exempt Federal Lands property have grown. Not only has the federal (A-68). However, even that study still left government added billions of dollars of real unexamined the question of how "nonopen property to its total holdings, but there is every space" federal property should be treated in indication that it plans to increase its real our intergovernmental fiscal system. Concern property holdings in the future. According to a regarding the proper fiscal treatment of this 1979 report of the U.S. General Accounting Of- property by both members of the Commission fice, the federal government is authorized to and members of Congress led the Commission,

iii at its fall 1978 meeting, to request that the staff the building in which it was situated, it is cur- undertake an examination of the intergovern- rently located in a privately owned, governmental implications of nonopen space federal ment-leased building upon which taxes are properties with specific attention directed to- paid, either through market rental payments to ward the question of whether Congress should the lessor or through explicit tax escalation enact some form of payment in lieu of tax pro- clauses (which are built into most GSA leases). gram designed to compensate state and local The second and perhaps more important of governments for the property tax loss due to the major inequities that are mentioned briefly the federal presence. here is the ad hoc method of "compensation" The major conclusions, findings, and recom- for tax exempt properties, which the federal mendations of the Commission's work are pre- government has developed over time, as is evi- sented in Chapter 1 of this volume. The re- denced by the existence of 57 different federal mainder of the report provides a more detailed payment programs. None of these programs look at the entire issue of federal payments in provides for a uniform payment for all types of lieu of taxes. A second volume of technical ap- federally owned property. Moreover, many of pendices will be issued soon. the payments are the result of negotiations From this analysis the Commission con- with federal agencies at the local level, rather cludes that there is a persuasive case for a uni- than being based on any guiding principles of form payment, based on full tax equivalency of fiscal economics. federally owned real properties, within the ex- Central to the report's analysis is a look at isting property tax structure of each respective the quantitative aspects of a comprehensive taxing jurisdiction. The findings and conclu- payments in lieu of taxes program, including sions are based upon extensive staff research, estimates of the cost of such a program to the which is supported on firm equity grounds. U.S. Treasury and the geographic distribution The equity issue is seen as at least a two-fold of the payments. The report includes a com- problem: plete discussion of the pros and cons of the On the one hand, the federal government has proposal for Congress to authorize a broad- not followed the traditional equity considera- payment program. This discussion ranges from tions of public finance, which would provide arguments that state and local governments that "like properties be treated alike." This is may not actually "need" additional real prop- manifest in the policy of directly or indirectly erty tax revenues to the viewpoint that a paying taxes for federally owned real property PILOT-type reform would generate significant in many, but not all, instances. ACIR's own lo- economic and political benefits to the federal cation provides one good example of this prob- and statellocal sectors alike. lem. Formerly located in the New Executive Abraham D. Beame Office Building, where no taxes were paid for Chairman Acknowledgments

Thisreport was coauthored by Robert D. ~bel report to the members of the Commission. Here and Joan E. Towles and prepared in the ACIR's it is difficult to adequately acknowledge every- division of Taxation and Finance directed by one who helped in this effort. The list, howev- John Shannon. er, would surely include the following: Richard The authors wish to especially acknowledge Almy, Michael Bell, Barbara Boslego, Donald the comments and assistance throughout the Boyd, Bob Breezee, Susannah Calkins, James writing of the report by Douglas Clark, Federal Carberry, Henry Coleman, Peter Crane, Jerry Provincial Relations Division of the Canadian Emrich, Anita Gaven, Susan Jacobs, I. M. Department of Finance; Edgar Estep and Vir- Labovitz, Richard Levin, Harry Levy, John ginia Collins, U.S. General Services Adminis- Lynch, Ted Masters, John Ross, Charles tration; John Behrens, U.S. Bureau of the Cen- Stephenson, Jim Stine, and Matthew Watson. sus; Robert Stein, Rice University; John Jacob Jaffe edited the final report and Lavinia Rackham, U.S. Postal Service; and ACIR col- Clarke and Ruth Phillips put in endless hours leagues Will Myers, and Frank Tippett. in typing several drafts of this study. In preparing this report the Commission followed its normal procedures of holding a Wayne F. Anderson thinkers' session to respond to the study Executive Director outline, continually consulting experts in public economics throughout the research process, John Shannon and formally presenting the draft report to crit- Assistant Director ics for their review prior to sending the final Taxation and Finance

Contents

Chapter 1 Introduction. Conclusions. and Recommendations ...... 1 Purpose and Scope of the Report ...... 1 Major Conclusions ...... 4 Private vs . Public Property Ownership ...... 10 Similar Federal Activities ...... 12 . Recommendations ...... 18

Chapter 2 The Intergovernmental Framework: The Current Status of Federal Payments to State and Local Governments ...... 21 Judicial Status ...... 22 )I McCulloch vs . Maryland ...... 22 Derivative Immunity ...... 24 Sales Tax Liability of Private Contractors ...... 24 Military Personnel ...... 24 District of Columbia Home Rule Act ...... 26 Possessory Interest ...... 26 Current Payment Programs ...... 26 Major Federal Payment Programs ...... 27 Shared Revenue and Receipts Programs ...... 27 Payments in Lieu of Taxes ...... 33 Formula-Based Programs ...... 34 Summary of Major Federal Payment Programs ...... 51 Other Federal Payment Programs ...... 52 Federal Corporations and Federal Financial Institutions ...... 52 Federal Payment to the District of Columbia ...... 54 Other Payments ...... 55 Review of Earlier Studies ...... 57

Chapter 3 Statutory and Administrative Considerations ...... 61 Conceptual Classification ...... 62 Institutions. Not Persons ...... 62 General vs . specific ...... 62 Property Tax Equivalency ...... 63 Computation and Scope of the Payment ...... 63 Exclusions From the Base ...... 64 TheTax Rate ...... 65 Other Administrative Considerations ...... 67 Valuation ...... 67 Federal or Local Assessment? ...... 68 Timing ...... 70 Jurisdiction Receiving the Grant ...... 70

Chapter 4 Conceptual Issues: Rationale and Alternative Forms of Measuring the Payment Base ...... 73 The Basic Framework ...... 73 Nature of Existing Grant Programs ...... 74 Nature of Proposed PILOT Grant Program ...... 75 Empirical Analysis ...... 76

vii Conceptual Justification for Enacting a Payments in Lieu of Taxes .... 79 Equity ...... 79 Unreimbursed Service Costs ...... 80 Leasehold vs . Ownership ...... 81 Federal Contracting (Procurement) ...... 87 EfficiencyINeutrality ...... 94 Revenue Productivity: Strengthening Fiscal Federalism ...... 97 Fiscal Accountability ...... 99 Alternative Forms of a Payments in Lieu of Taxes System ...... 99 Partial Tax Equivalency ...... 100 Threshold ...... 100 ACeiling ...... 100 A Cutoff Date ...... 101 Alternative Tax Bases ...... 101 Cost-of-Services ...... 101 Adjusting for Federal Own-Services ...... 102 Net Benefits (Benefit-Cost) ...... 103 Fixed Formula Approach ...... 105

Chapter 5 Quantitative Aspects: The Base and Yield of a PILOT .... 109 Estimating the Current Value of Federal Real Property (1978) ...... 110 Aggregate Data ...... 110 Presentation of the National PILOT Base Totals ...... 110 Detailed Data ...... 114 PILOT Yield ...... 115 PILOT as a Replacement for Current Ad Hoc Programs ...... 125

Witness Statements Statement of D.H. Clark. Assistant Director. Federal Provincial Rela- tions Division. Department of Finance. Government of Canada ... 130 Statement of Charles M . Stephenson. formerly Chief. Research Staff. Tennessee Valley Authority ...... 133 Statement of Robert W . Rafuse. Jr., Deputy Assistant Secretary for State and Local Finance. U.S. Department of the Treasury ...... 136 Statement of Kenneth W . Hunter. Senior Associate Director. Program Analysis Division. U.S. General Accounting Office ...... 138 Statement of Richard J . Davis. Mayor of-Portsmouth. VA ...... 142 Statement of Jerry K . Emrich. County Attorney for Arlington County. VA ...... 144

Tables. Charts and Figure Tables 1 Federal Shared Revenues and Receipts Programs ...... 28 2 Federal Payments in Lieu of Tax and Formula Based Pro- grams (1978-80) ...... 36 3 Education lmpact Aid Payments to U.S. States and Ter- ritories. Under P.L. 81 -81 5 and P.L. 81-874, 1978-80 44 4 Education lmpact Aid Payments to the 45 Most Populated U.S. Cities. 1978 and 1979 ...... 46 5 Education Impact Aid Payments to Selected Cities and Counties. 1978 and 1979 ...... 48

viii Federal Home Loan Bank Property Tax Payments for Real EstateTaxes ...... 53 Correlation Between Selected Municipal Characteristics and the Total Value of all Federal Real Property Within Municipal Boundaries for the 45 Largest U.S. Cities and a Random Sample of 40 U.S. Cities with a Population Greater than 25,000,1978 ...... Correlation Between Selected Urban County Characteris- tics and Total Value of Real Federal Property Within County Boundaries ...... Regression Model and Estimates for Total Real Federal Property ...... Estimated Property Taxes Paid Through Federal Home Loan Bank Building Leases and (Amount of Rent), 1977-79 ...... Estimated GSA Real Estate Tax Payments Through Tax Escalation Clauses in Leases, Partial Listing, 1978-80 ...... All Real Property Leased by the Federal Government in the United States, 1957-77 ...... Real Property Leased by the Federal Government for Civil Agencies in the United States, 1957-77 ...... Real Property Leased by the Federal Government for De- fense Activities in the United States, Civilian Func- tions Only, 1957-77 ...... Real Property Leased by the Federal Government for De- fense Activities in the United States, Military Func- tions, 1957-77 ...... Percentage Growth in Real Property Leased by the Fed- eral Government in the United States, in Five-Year Intervals, 1957-77 ...... Percentage Growth in Real Property Leased by the Fed- eral Government in the United States, Selected Periods, 1957-77 ...... State-Local Intergovernmental Revenue, by Amount and in Relation to General Revenue from Own Sources, for Level and Type of Government, Selected Years, 1955-79 ...... Estimates of 1978 Replacement Value of Federally Owned Real Property, by Alternative Real Property Bases (Phases) ...... Replacement Value Estimates for Military Real Property Owned by the Federal Government, 1978 ...... Estimated Value Estimates for Civil and Military Real Propefly ...... The Value of Federally Owned Real Property in the United States, by State, 1978 ...... Effective Property Tax Rate Used to Compute Estimated Federal Property Tax Payments, 1978 ...... 123 Estimated PILOT Payments for Each Phase and Group, by Varying National Effective Tax Rates ...... 124

Charts 1 Value of Land, Buildings, and Structure and Facilities Rep- resented as Shares of Total Federal Real Property Value, 1978 ...... 2 Estimated Federal Payments for Receipt Sharing, "PILOT" and Formula-Based Programs, Precent of Total Payments, 1979 ...... 47 Value of Real Property Owned by Various Civil Agencies as a Percent of Total Federal Civil Property in the United States, 1978 ...... 118 Value of Real Property Owned by Various Military Branches as a Percent of Total Defense Property in the United States, 1978 ...... 119 Value of Federally Owned Real Property in the United States, by State and Region, 1978 ...... 120 Value of Federal Real Property as Percent of Market Value of Federal Plus Assessed Private Taxable Property, by State and Region, 1978 ...... 121

Figure 1 State Income Tax Treatment of Military Pay ...... 25

Chapter 1

Introduction, Conclusions, and Recommendations

PURPOSEANDSCOPEOFTHE REPORT

Thefederal government is the single largest owner of real property in the United States. It currently owns 775.3 million acres, more than one-third of the country's entire land area. In addition, it owns 23,988 installations, 2,598 million square feet of floor area, and various other buildings and structures and facilities. In 1978, the total value of U.S. real property was valued at approximately $279 billion, 23% in land, 53% in buildings, and 24% in structures and facilities. (See Chart 1 .) These holdings include forest reserves, office buildings, harbors, housing projects, grazing lands, waterways, airports, cemeteries, hospitals, defense bases, parks, power lines, utility systems, museums, industrial facilities, com- munications systems, railroads, navigation and traffic aids, monuments and memorials, and even islands used for military target practice. Moreover, the magnitude of these holdings can be expected to grow. At present the U.S. government is authorized to acquire up to $4 billion worth of private land during the next three years. In fact, a recent report of the U.S. Gener- al Accounting Office notes that the National Park, Forest, and U.S. Fish and Wildlife Ser- vices have been consistently following a gener- Chart 1 VALUE OF LAN~,BUILDINGS, AND STRUCTURE, FACILITIES REPRESENTED AS SHARES OF TOT, FEDERAL REAL PROPERTY VALUE, 1978

Buildings 53.2%

All Federally Owned Real Property in the United States

SOURCE: Table 19. a1 practice of acquiring as much private land as but as a lessee of private real estate. In fact, in possible "regardless of need, alternative land. 1978 approximately $320 million was paid in control methods, and impacts on private land- this manner, and distributed among various owners."' taxing jurisdictions according to the mix of The incidence of federally owned properties leasehold vs. ownership decisions made by the varies widely across the 50 states. They are lo- separate U.S. government agencies and instru- cated in both rural and urban areas, and are in- mentalities throughout the country. dustrial and nonindustrial, residential and In short, the federal payment and tax system commercial, permanent and semipermanent. is a patchwork of uncoordinated programs. The Some of them provide largely local services, federal establishment could use similar while others are regionally or nationally ori- amounts of real property in each of ten differ- ented. Some profoundly affect the fiscal and ent localities and, depending on a host of dif- economic base of their communities, while oth- ferent institutional factors, pay different .ers have only the most minor of impacts. amounts of tax revenues or in lieu pay- The one generalization that can best be made ments-or no payment-to each of the ten ju- regarding the array of federally owned property risdictions. is that there is no guiding principle regarding This diversity of the federal government's the extent to which the federal government as a definitions of its taxable [including payments property owner should contribute to the finan- in lieu of taxes) status relative to state and local cial support of state and local governments. jurisdictions creates critical policy questions. Some local governments share in the revenues They concern not only the lease vs. own-type generated by federal establishments operating of considerations mentioned above, but also within their borders, primarily from mineral other major issues, such as (1) the equity of leasing or from the sale of grazing, farming, taxing private property owners while ex- and forestry rights to private interests. On oth- empting federal agencies when both derive lo- er properties, Congress has recognized a re- cal public service benefits, and (2) the effect of sponsibility for a partial or full payment in lieu the tax exemption on the federal government's of taxes (PILOT) to state and local governments use of land and on the local tax base. as compensation for property taxes foregone. In view of these issues, the ACIR has under- For some of its instrumentalities, such as its taken, in two separate studies, a detailed exam- various banking and credit institutions, the ination of the nature of the current system by federal government has authorized the full which the federal government compen- range of direct statellocal taxation. Most com- sates-or fails to compensate-state and local monly, however, the Congress has declared the governments for the presence of federally U.S. government exempt from both direct owned tax exempt properties. statellocal taxation as well as from any in lieu The first of these Commission reports, pub- of tax responsibility. This is true despite the lished in 1978, was an analysis of the adequacy fact that, over the years, its own committees of federal payments to local governments for and study groups have recommended enact- specific types of tax exempt federal lands ad- ment of some form of uniform payment system ministered by the Bureau of Land Management, to compensate all states and localities for the the Forest Service, the Army Corps of Engi- effect of the federal presence on property tax neers, the Bureau of Reclamation, and the Na- revenues. Indeed, in 1969, the Joint Economic tional Park Service.3 Specifically, the study Committee of the U.S. Congress, arguing "only evaluated the payment programs directed basic equity," urged that Congress make pay- largely toward the western U.S. counties under ments in lieu of real property taxes on property various receipts-sharing and guaranteed per- owned by both the U.S. government and for- acre payment programs as provided for under eign governments (embassies, consulates, mis- the Payments In Lieu of Taxes Act of 1976. sions) in the U.S.2 This law, P.L. 94-565, covers National Forest It should be recognized, of course, that the lands, as well as most other types of federal federal government already does "pay" proper- open spaces. P.L. 94-588, enacted shortly ty taxes-not in its role as a property owner, thereafter, expanded, from "net" to "gross," the income from National Forests subject to and irrigation, grazing, roads or bridges (unless sharing. contained within a federal establishment), and Despite the breadth of coverage of that monuments and memorials. The PILOT base report-nearly 90% of federal public lands also excludes land in the public domain (land were included-it left unexamined the ques- which was originally placed in U.S. ownership tion of how "nonopen space" federal proper- by virtue of its sovereignty and which has nev- ties, including both land and improvements, er left federal ownership, including lands ob- should be treated in our intergovernmental fis- tained by the government through exchange of cal system. This group of real properties in- public domain lands). cludes office buildings, post offices, military Once this base is determined, Chapter 4 es- bases, special purpose facilities, as well as the tablishes a normative framework for evaluating undeveloped lands not under the jurisdiction alternative justifications given for a real prop- of the agencies cited in the 1976 act. These fed- erty tax equivalency PILOT, and the PILOT eral holdings present another set of issues proposal is evaluated according to various eq- regarding federal land acquisition and manage- uity, efficiency, and adminstrative considera- ment practices, the adequacy of current com- tions. In addition, alternative bases for a tax- pensatory payment programs, and the impact equivalency PILOT are discussed. of these federal properties on our intergovern- The main text of the report concludes in mental fiscal system. Chapter 5 with a detailed discussion of the Accordingly, the Commission requested that current methods employed by the government the staff undertake an examination of the to inventory and value its real property hold- intergovernmental implications of these addi- ings, and then presents information regarding tional federal properties with specific attention the cost and geographic distribution of the PI- directed to the question of whether Congress LOT if it were enacted on a property tax equiv- should enact a broad-based system of payments alency basis. in lieu of taxes (PILOT) designed to compensate state and local governments for the federal MAJOR CONCLUSIONS presence. This report addresses that request. Specifi- A number of major conclusions have been cally, it examines whether a federal payment drawn by the Commission staff based on the re- should be made on the value of properties search findings associated with the broad owned by the federal government and its scope of this study. These conclusions are: agencies and instrumentalities, or whether it is A. The federal government lacks any preferable to maintain the current system. The procedure that permits it to know the study presents an analysis of the conceptual, current value of its real property quantitative, and administrative issues associ- holdings in the U.S. Except for the ated with existing and proposed payment pro- estimates for 1978 made in this re- grams. port, there is no inventory of the Chapter 2 begins with a discussion of the ju- total value of tax,immune federal dicial (taxable) status of federal properties, and property. In order to receive useful then describes the nature of the special federal information for policy regarding the payment programs designed to compensate federal government's property some states and localities for property tax reve- wealth, Congress must require that the nues foregone because of exempt holdings. General Services ~dministration The nature and scope of the base needed to make major adjustments in its methods design a uniform real property PILOT system is of collecting information. examined in Chapter 3. Because the study focuses solely on "nonopen space" real proper- There is a great need to develop new policies ties, the PILOT base is defined here to exclude and improve basic management practices for land such as that used for flood control and information relating to federal property hold- navigation, historic sites, parks (including ings. In spite of the fact that it is the largest urban parks), forest and wildlife, reclamation landlord in the country, the U.S. government has not only failed to keep track of its facilities' Owned by the United States Through- locations; but, also, it lacks the necessary infor- out the World. mation to maintain properly and evaluate the condition of its holdings and their community The third document condenses most of the in- impact. The General Services Administration formation in the other two by reformatting ta- (GSA), which has the primary responsibility for bles and highlighting certain statistical sum- "ownership" and management of federal prop- maries with appropriate narrative. Other real erties, does not maintain accurate information property inventories are also compiled annual- regarding the location, nature, or cost of feder- ly by each branch of the armed forces. al real property. Because of this inadequacy in The GSA is responsible for reporting on basic recordkeeping, additional employee and general purpose buildings (such as office training resources should be allocated for the buildings and warehouses] that are occupied purpose of maintaining accurate, complete, by a federal agency or agencies upon determi- and current information on each of the federal nation by GSA, and are maintained and ser- government's holdings. viced by GSA. The other reporting agencies are In its present form, GSA's Annual Inventory those which have control of, and authority to of Real Property Owned by the U.S. Through- assign and reassign the use of any portion of, out the World is of questionable value to feder- federal property and, in the case of special pur- al property management and planning efforts. pose buildings, those agencies having control Although it is the federal government's pri- of building management and operation. As the mary source of information on its real proper- agency responsible for inventory, however, ties, inventory records are incomplete and in- GSA must file and code each agency report, clude only historical cost data which are of yielding the hefty detailed inventories, with little use for current property analyses. thousands of pages, as noted above. Systems analysts and data managers at GSA The detailed inventory of federal real proper- frequently do not receive accurate or timely in- ty is organized by federal agency and, within formation on federal holdings from other re- the U.S., by state and city. It lists the type of porting agencies and do not have adequate staff property, predominant usage class, and loca- resources to manage the computer systems tion (state, city, and county) for each installa- which are used for federal property inventory. tion, which is the reporting entity. Installations Authority for preparing the GSA real proper- vary in size and type, ranging from a national ty inventory is contained in the Federal Prop- park or a hydroelectric project to a single office erty and Administrative Services Act of 1949 or vacant lot, each property entry being (63 Stat. 377), as amended, and is continued at identified as "land," "buildings," or "struc- the request of the U.S. Senate Committee on tures and facilities." An installation can also Appropriations. The GSA accordingly provides be a combination of these types of property a detailed listing of real property owned and without the use (usage code) of each parcel be- leased by the federal government inside and ing coded separately. Following this basic or- outside the U.S., including the cost to the U.S. ganization, the report details other federal government for each holding. Published at the property management information, such as the end of each fiscal year, three GSA reports list year in which the installation was acquired or those properties used by both military and ci- constructed, the floor area (by square feet), vilian agencies at the end of the preceding fis- acreage (to the nearest tenth of an acre), and cal year. They are: the original cost of each parcel of land, build- 1) Detailed Listing of Real Property Owned ing, structure, or facility. by the United States and Used by Civil In conducting this research study, the ACIR Agencies Throughout the World; staff used GSA's inventory extensively. It 2) Detailed Listing of Real Property Owned found that several major improvements and by the United States and Used by Mili- quality controls on the base are necessary if the tary Agencies Throughout the World; data are to be useful in future analysis of cur- and rent property holdings. In this regard, at least 3) Summary Report of Real Property three substantive and procedural proposals can be made to increase the accuracy and internal In lieu of an in the field reassessment effort, consistency of the reported data. certain techniques can be applied to the existing data base to provide an annual estimate Record current value of federally owned of the current value of these properties. For ex- properties. ample, a time series set of inflators and price The most important requirement is for the in- indexes can be applied to the real property inventory to provide current dollar value of the ventory to yield reasonably accurate data upon properties owned by the federal government. which to base an estimated PILOT. In fact, by The positive administrative and public policy working with local governments and other fed- features of full disclosure of the value of tax- eral reporting agencies, GSA could improve its able and tax exempt properties will become cost data rather quickly and easily. To improve clear later; for the present, however, valuation on these trending-type data, the federal govern- is important in order to show accurately not ment could conduct field appraisal of its prop- only the acquisition cost of a property to the erties on a periodic basis. government (as required by law), but also an Develop internally consistent reporting estimate of a property's current market value to requirements for all federal properties. facilitate planning and life cycle analysis at both the agency and aggregate federal levels. The GSA inventory should record the same The GSA cost figure is recorded in its pres- data for all types of federal property or make its ent form because original Congressional re- data consistent among the separate classes of quirements specified only that costs "to" the federally owned property. Presently, the cost of United States government be identified in the properties acquired through donation, ex- inventory. This has been interpreted to mean change, forfeiture, or judicial process is esti- costs at the date of original acquisition or con- mated at amounts the government would have struction by the government, along with some had to pay for the properties if purchased at the adjustment for subsequent construction date of acquisition. In contrast, no costs are in- changes. When actual costs are not ascertain- cluded in the inventory report for public do- able, they are estimated on the basis of acquisi- main lands, whether unreserved or reserved for tion date. Major capital improvements-items national parks, national forests, or military res- that will require an outlay in excess of ervations, or for historical sites that were not $500,000 and must be budgeted by specific originally acquired by purchase. However, the Congressional appropriation-are also in- acreage of these lands and other descriptive cluded in the inventory, frequently as separate data are fully listed, even with these cost omis- line items. When costs are aggregated by total sions. * installation, agency, or jurisdiction, however, In addition, complete data are not reported the costs are summed across the years. The re- for lands, buildings, and structures and facili- sult is that some line items may show an ties which are not wholly owned by the federal amount spent by the government in a particu- government. Lands that are not owned in fee lar year for one purchase or improvement, while others may show a set of historical costs summed over a period of years for one or more purchases and major or minor improvements. "Public domain" is defined to cover original public Thus, the Congressional requirement to re- domain lands and those withdrawn from the original cord costs to the government is satisfied only public domain for specific uses of the various federal agencies. The term "original public domain land" em- to the extent that total dollars spent over a peri- braces all the area title which was vested in the U.S. od of years are summed and recorded. From a government by virtue of its sovereignty. Public domain policy perspective, this total is almost mean- lands are thus both original public domain which have never left federal ownership and also lands within fed- ingless. Moreover, because the GSA summary eral ownership which were obtained by the govern- lists only an estimate of the total dollars paid ment in exchange for public domain lands or for timber over the years to acquire or construct federal on such lands. Original public domain lands which have reverted to federal ownership through the opera- real property, it gives no indication of the cur- tion of public land laws are also included in the cate- rent dollar value or appraisal of this property. gory. simple are listed elsewhere in the inventory re- As currently assigned in the real property in- port, if at all. For example, data on properties ventory, the urban code of a federal installation held in trust by the federal government are lim- provides no guarantee that the installation is ited to acreage and number of buildings and actually located within that jurisdiction. The are shown separately in another section of the criteria for GSA urban or rural property classi- report. Moreover, the inventory excludes en- fications follow the rather meaningless deline- tirely the following items: lands administered ation of either being located in or out of incor- by the U.S. under trusteeship for the United porated areas of 2,500 persons or areas with Nations; lands owned by the sovereign govern- similar characteristics. Barring the use of these ments of the outlying areas of the U.S. (Guam, guidelines, an area could still qualify for urban Samoa); easements, rights of way, and proper- status ff it at least had a street address. Howev- ties acquired (usually temporarily) in settle- er, the coup de grace remains: installations that ment of a claim by, or debt to the government. are not in an urbanized area are given the GSA Costs for structural changes to buildings and geographic city code of the nearest locality. facilities which are not owned by the U.S. are Consequently, as many as 50% of the installa- also excluded, although federally owned build- tions are not located within the jurisdictional ings and structures and facilities located on boundaries of the city indicated by their GSA leased land are detailed. Information on real inventory code. The city code is therefore high- property and land that is leased by the federal ly suspect and the efficacy of its use question- government is contained in a separate set of in- able. ventory reports published by GSA. The geographic dimensions of both city and The point here is that while GSA may ac- county indicate a higher accuracy of county quire different types of information for differ- codes in the GSA detailed inventory. Because ent types of properties, it should avoid "mix- counties are larger than cities, the county loca- ing apples with oranges." The agency may, for tion of an installation can usually be assigned good reasons, decide to separate the lands it in a relatively straightforward manner. When owns from the lands it holds in trust and to list an entire installation is contained in more than costs (or, preferably, current values) for the one county, however, some other decisions former rather than the latter. However, because need to be made. At present, some reporting they are properties which are wholly owned by agencies list the installation in the county with the federal government, public domain lands the larger holding. However, it is still common might reasonably be listed with appraisals or practice (and, until the 1979 inventory report- estimated current values in the same manner as ing forms, specified by GSA) to give multi- donated lands or lands acquired by means oth- county and some multicity installations a er than by purchase. In sum, refined or newly "999" or "9999" (respectively) geographic developed reporting requirements should go code, which excludes that installation from the beyond a listing of the historical costs to the corresponding GSA county, city, or county and federal government and instead present uni- city-detailed listings. form current value data for all federally owned As a result of this practice, the "999" parcels properties. are clustered at the end of each state detailed inventory listing and can be used in national The GSA should maintain accurate re- and state summary totals, but not in city or cords on the precise location of each of county totals or subtotals. These lands are held its facilities. primarily. by the Bureau of Land Management (e.g., administrative, recreation, sanitation, and Considering the impacts of and interest in fa- camping stations, usually in the public do- cility locations, the GSA should record the main), the Army Corps of Engineers (e.g., proper city and county jurisdictions in which locks, dams, reservoirs, lakes), and the Depart- each of its facilities is located. This proposal ment of Defense (e.g., large military installa- would require a redefinition of what consti- tion~).~Indeed, as much as three-fourths of the tutes an "urban" or "rural" location, as well as military holdings may be listed with this code. greater field accuracy for reporting to GSA. For this study's purposes, most of the "999" problem was overcome by patching together special and discriminatory taxes on the federal alternative military data bases and by reporting government could make it dependent on the real property values on a state-by-state basis state government, thus violating the "great rather than by places and types of local govern- principle" of federalism that "the Constitution ment. and the laws made in pursuance thereof are su- A second caveat applies equally to the coun- preme." At the same time, however, Marshall ty and city geographic code listings; some in- also specifically noted that the McCuJJoch vs. stallation codes reflect the location of a mili- Maryland decision did not extend to general tary command or regional office ("parent" and nondiscriminatory taxes which fell on the code) rather than the city or county in which federal establishment. the subject land, building, structure, or facility During the next century, subsequent court may be situated. Although the extent of inaccu- decisions expanded the doctrine of federal tax racy resulting from this practice is not known, immunity and, at one point, even extended the the error appears to be confined to Army and primary immunity of the governmental activity Navy holdings. To correct this situation, there over its own operation to the derivative immu- will have to be some manual checking and nity of third persons, such as employees and recoding of data records to separate installation lessees of the federal government. location from its command name or location. Beginning in the 1930s, however, the judici- The Navy is at present undertaking such a proj- ary began to sharply narrow the immunities ect; others should follow suit. doctrine to the point where, today, it is gener- If these collective findings are addressed, the ally accepted that Congress has full statutory existing GSA data base would be improved im- power to define the scope of statellocal tax im- mensely. In addition, it would become more munity for federal agencies and instrumentali- consistent with the corresponding military in- ties. The progression since the 1930s from a ventories and would thus be a better check on broad to a narrow application of the immuni- the condition of each agency's holdings. ties doctrine is clearly illustrated. For example, in 1936 the Congress, through the Hayden- Cartwright Act, consented to state taxation of B. The Nature of the Legal Framework sales of gasoline and other motor vehicle fuels for Property Tax Immunity Has Changed on federal enclaves when such fuels were not Over Time. used exclusively by the federal government. There are no inherent constitutional barriers That same year, the Congress also authorized to either the direct imposition of nondiscrimi- the application of state workmen's compensa- natory statellocal taxes on federal real property tion laws to federal areas. In 1939, it provided or an equivalent payment in lieu of taxes on for the application of state unemployment com- real property owned by the U.S. government. pensation laws. The Buck Act of 1940 per- In both cases, only statutory consent of Con- mitted the states to impose sales, use, gross re- gress is required. Moreover, such statutory ac- ceipts, and gross and net income taxes on tion, particularly in the case of actual taxing private persons within federal areas. Nine power, can be viewed as part of a continuing years later, the Wherry Housing Act authorized process of limiting the scope of the intergov- state and local governments to tax the interest ernmental tax immunities doctrine. of private individuals who lease land on mili- The doctrine that the federal government tary reservations, construct housing, and rent it may not be taxed by a state or local government to military personnel. had its origin in the U.S. Supreme Court's 1819 As the immunities doctrine was narrowed, McCuJloch vs. Maryland decision, which in- Congress also began to recognize its fiscal re- validated a State of Maryland tax directed at sponsibilities for compensating state and local the Baltimore branch of what was then the governments for the effects of federal tax im- United States Bank. The Maryland law was as munity. Currently, three principal methods are strong as it was discriminatory against the fed- used by Congress to compensate state and local eral bank. Accordingly, Chief Justice John governments for the federal tax immunity: pay- Marshall, speaking for the Court, declared such ments to states and localities of a specified percentage of revenues from federal operations; federal immunity issue, this loss is, indeed, payments by the federal instrumentality of a quite large. In 1978, the current dollar value of tax equivalent out of revenue receipts or appro- all federally owned property in the U.S. that priations; and the waiver of federal property was exempt from real property taxation tax immunity. The waiver was first authorized amounted to $279 billion. If one excludes on real property acquired by the Reconstruc- "open space" lands (as is proposed in Chapter tion Finance Corporation, on foreclosed prop- 3 of this study), the total erosion amounts to erties, and on many war plants acquired during $210 billion. To put this in perspective, if this or after World War 11. It is now authorized for $210 billion were fully taxable, and no other the real property holdings of federally owned adjustments were made in current property tax corporations and federal financial institutions rates or federal payment programs, $3.65 bil- (federal credit unions, Amtrak, the Federal De- lion would have been added to state and, pri- posit Insurance Corporation, the Federal Home marily, local treasuries (96%).5 This is equiva- Loan Insurance Corporation, and the Federal lent to an increase in total local property Reserve Banks). collections of almost 6%. Thus, although considerable legal controver- If local governments could make up for this sy remains over the exact status of the immuni- revenue loss by simply using nonproperty tax ties doctrine, during the past half century there sources more extensively, the policy concern has been a clearly observable trend for Con- regarding this erosion of the revenue base gress to reduce the effects of the immunities might not be so important. However, the "open doctrine on state and local governments. Enact- economy" * characteristic of subnational gov- ment of a comprehensive PILOT for U.S.- ernment virtually dictates that local govern- owned real property, or for that matter Con- ments must employ taxes on immovable prop- gressional consent to direct statellocal real erty as the mainstay of their own-source property taxation of the federal government, revenues. Moreover, in the present fiscal envi- would not be a radical departure from existing ronment, which provides for a growing locaI intergovernmental tax arrangements. On the dependency upon outside-state and feder- contrary, it is a logical extension of those rela- al-aid to local governments, the maintenance tionships. of own-source revenues to meet both traditional and recently mandated costs at the local lev- C.Federa1 tax exemptions erode a el has become more important. large part of state and local tax Stated otherwise, if an accepted goal of U.S. bases. federalism is to have a financially strong and Several arguments can be marshaled both for independent local government sector that is and against any type of institutional exemption able to carry out peculiarly local functions- from a comprehensive tax base. The justifica- such as the provisions of police, fire, and judi- tion given for exemptions range from the cial protection, public education, and low to "need" to provide locational incentives to moderate income housing services-then a some private firms, to the simple fact that the closer look at the policy of federal real property exemption is mandated by a higher level of tax immunity is clearly warranted. government and therefore is beyond local control. The arguments against exemptions usually D. The federal immunity from state and local taxes violates major equity center on the concerns for taxpayer equity and principles of public finance. economic efficiency, and the erosion of the local tax base. Each of these topics has been ex- Because the federal government is exempt amined in this report as it relates specifically from paying state and local taxes on most of its to the immunity of the federal government activities and properties, a basic equity princi- from state and local taxation. From an overall local policy perspective, perhaps the most important of these issues centers ' An open economy is characterized by a high degree of mobility of goods and factor movements across juris- on the local government revenue loss from real dictional borders-activities which a local government property tax exemption. In the context of the cannot constrain. ple of public finance is violated: that "taxpay- the government expenses incurred educating ers" (herein, institutions) in similar circum- the children of the firm's work force, providing stances should be treated similarly. This equity increased welfare and other social services, violation arises both when the direct property and expanding and maintaining its physical taxpaying status of private institutions is juxta- infrastructure (airport or harbor capacity, high- posed with that of federal government agencies ways and streets, sewers) to meet additional and instrumentalities and when the indirect demands placed on these facilities. taxable status of federal leasehold activity is The federal establishment, through its insti- contrasted with the exempt nature of federal tutions, clearly generates the same sort of costs. property ownership. In fact, it would be wholly reasonable to replace the words "federal institution" with Private vs. Public "business firm" in most (if not all) of the exam- Property Ownership ples cited above. Although the private firm has a different raison d'etre than does the federal For practical reasons relating to the open government, from an intergovernmental per- structure of state and local economies, tax base spective the role of the subnational government accessibility considerations restrict the form of as a factor of production and provider of ser- taxes state and local governments can use to fi- vices (including the very provision of the nance public goods and services. As a result, marketplace) is the same for both institutions. there is a heavy reliance on the real property Consequently, to the extent the local govern- tax, especially among localities, to finance the ment must finance its resulting service expen- entire range of public expenditures. For the ditures from the property tax, all of the com- same fundamental tax base accessibility rea- munity's beneficiaries of these expenditures sons, local government must include in that should make property tax contributions. property tax base institutions (e.g., business Thus, when the federal tax immunity is con- firms) as well as individuals. This is because trasted to the taxpaying status of the private the use of the institutional enterprise as a tax business firm, the conclusion that a fundamen- collecting intermediary is the only procedure tal inequity exists is inescapable. available to subnational governments for as- The nature of the fundamental equity viola- sessing individuals-wherever they may re- tion, though valid, is not quite as neat and side-for the benefits of public services that straightforward as this initial statement sug- accrue to them initially through the institution. gests. One might reasonably argue that even if It follows that, as a principle of taxation, the the property tax should or will exist (a pre- services of subnational governments should be sumption which rules out solving the inequity treated as a factor of production, just as are the by abolition of the property tax), other "real services of the private factors of land, labor, world" examples of the violation of the equity and capital. Moreover, this principle applies to principle are so important that the violation of private (e.g., business) and public (e.g., higher the equity goal cited here is primarily academ- levels of government) sector activities alike. ic, rendering the differing treatment of private Consider the case of the private business business and government an interesting but not firm. The list of local public services accruing convincing status. These other examples in- to firms is a long and familiar one, consisting clude (I) the fact that in some instances the of both direct and indirect expenditures in- federal government provides local services to duced by the business presence. The direct ex- itself; (2) the recognition that, although the penditures, which are fairly obvious, include federal government does create public service services such as fire and police protection, the costs such as those noted above, it also creates courts, and the bus or the transit authority significant economic benefits to the jurisdic- which transports the firm's workers. Less obvi- tion in which it is located; (3) the fact that the ous, but equally important, are the indirect state andlor local governments grant numerous costs incurred on behalf of the private business partial or full property tax exemptions to pri- community-costs which may be quite signifi- vate profit and nonprofit businesses alike; and, cant for some communities. Examples include (4) similarly, the fact that not only does a state government usually declare itself exempt from In this discussion, the driving force behind local taxes, but, in addition, it may mandate a the argument that there is an inequity between local tax exempt status for some private insti- the private institutional taxpayer and the tax tutions. exempt federal establishment was that al- Each of these arguments has merit. However, though both contributed to the cost of local there are good reasons to reject each of them as government, only the private sector could be a reason for not addressing the equity violation taxed to finance these public expenditures. discussed above. The rationale for this conclu- The other side of this economic equation is sion follows. that institutions also create a stream of economic and financial benefits for the communi- I. Some federal facilities provide "local" ty. The presence of a federal office building or services to themselves. a military base means increased payrolls, retail Any debate regarding the inequity of the fed- sales, and personal incomes, which not only eral property tax exemption must consider the add directly to the overall economic well-being fact that some federal agencies provide of the residents but also indirectly expand the statellocal government-type services for their private sector tax base. Again, the argument own personnel which thus reduces their contri- has considerable merit-a fact that is attested bution to public budget costs to below what to each time state and local officials attempt to they otherwise would be. The strongest case for block the closing of a local federal facility. this argument is the military facility, which of- However, the same kind of benefit stream is ten has its own police, fire, sanitation, and on- created by major private business enterprises. base transportation services. A corollary to this Striking examples-such as the aircraft indus- is that the most significant direct service activ- try in Seattle, the tourist industry in Miami, ity not provided by the base-education-does and the financial center in New York-illus- receive federal assistance under the Federal trate the obvious cases and can, for example, be Impact Aid Programn6 compared to the also large benefits to the Na- Although the argument has some merit, a tional Capitol area from federal office facilities close examination also shows that it is not suf- or the many "military towns" throughout the ficiently persuasive to provide a basis for even country. Comparable smaller examples-such a policy of partial tax exemption. This is true as the local grain elevator and the federal post for two reasons: office-also exist. The obvious point is that, First, the argument focuses entirely on a site- just as the federal presence creates community oriented direct cost-of-service concept, ignor- economic benefits, so does the private sector's ing the reality that in the intergovernmental presence. It makes no more sense to provide budget context the property tax is the primary property tax exemption for the Bolling Air own-source revenue by which local govern- Force Base in the District of Columbia than it ments finance most property and service- does for the Boeing Airfield in Seattle. Indeed, related public expenditures. if anything, this "benefits" argument empha- Second, though the argument correctly notes sizes the economic similarity of the private and that the federal government may provide some federal property owners and reinforces the of its own services, it does not necessarily fol- "equal treatment of equals" case for taxation low that those activities are supplanting simi- (or PILOT), not a case for selective exemption. lar statellocal services. Indeed, it is equally 3. There are private institutional property plausible that the federal police or fire services tax exemptions and state government only supplement readily available public exemptions. services-much the same as many large private business firms that provide their own security There is very little discussion in this report forces, trash removal facilities, and site im- concerning locally granted institutional provements. property tax exemptions for nonprofit religious, charitable, and educational institutions. 2. Benefits are created by the federal pres- Similarly, practically no discussion is devoted ence. to the issue of whether exemptions as tax incentives for profit-oriented businesses in recent years. During the period 1957-77, the "should" be made. The view adopted here is federal government increased its leased floor that not only have these topics been adequately area by 148% compared to a 17.5% increase in discussed elsewhere,' but that the whole issue its owned floor area. Indeed, in the last ten is simply outside the scope and purpose of this years alone, the federal government has in- report-viz, to examine and evaluate the eco- creased its rented building area by 50%-an in- nomics of the federal real property tax immuni- crease that was accompanied by a 134% growth ty. Thus, regarding the existence of private in- in annual rents. stitutional exemptions, it is sufficient to note A similar type of tax inequity is created by that there is an obvious and fundamental the federal government's decision to spend be- "home rule" distinction to be drawn between tween one-fourth and one-fifth of its total the locally voted private institutional tax ex- budget in purchasing from the private sector emption and the exemption that the federal products and services ranging from office sup- government effectively mandates for itself. plies to the development of sophisticated However, it is somewhat more difficult to ra- weapon systems. When these items are pur- tionalize the local property tax exemptions for chased from the taxable business entity, the state property or for private properties which firm acts both as a supplier of the final com- enjoy immunity due to state laws or state con- modity and as a conduit or intermediary be- stitutional provisions which mandate the local tween the tax collecting governments (federal exemptions. The analogy between the inequi- as well as state-local) and the taxpaying pur- ties created by the federal immunity and these chaser of the final. product. In contrast, when immunities of the states is clear; in each case a these same services are provided on an "in- higher level of government is overriding house" basis out of tax exempt federal facili- "home rule" decisions. ties, no "business" tax contributions are made. Nevertheless, despite the linkages of federal One way to alleviate this inequity, regardless and state-determined immunities from local of the in-house vs. procurement mix, would be real property taxation, the state-to-local- to attach some form of PILOT to the in-house government issue is not examined at length activity. here.8 Suffice it to say that many of the argu- E. Although Congress has recognized a ments pertaining to the federal government's responsibility to some local govern- immunity from the local real property tax could also be made for the states. ments for making some form of in lieu of tax payment to "compensate" Similar Federal Activities for the federal presence, the result has been a patchwork of uncoordinated and ad hoc federal In addition to the major structural inequity payment programs that has developed between the tax treatment of federal and pri- over the years. vately owned real property, another equity problem is created by the fact that the federal The federal government has responded to government already does pay property taxes in- some of the local governments wherein it holds directly on some federal activities that are con- tax exempt real property in several substantial- ducted in buildings leased from private own- ly different ways. The first of these is by ers, while others operate out of fully tax consent to taxation, under the principles of exempt federally owned real properties. When uniformity, as if the federal government were a the federal government leases private property, private, fully taxable entity. Federally owned it not only pays real property taxes as a result corporations and financial institutions are in- of "pass-through" agreements but also because cluded in this category. Another method of of explicit tax reimbursement clauses in leases compensation is through "inkind" expendi- with private property owners. As noted earlier, tures provided to communities with large in 1978 approximately $320 million in federal amounts of federally owned land. However, the property tax payments was made in this man- primary methods of compensatory payments to ner. Moreover, this trend has been increasing state and local governments for tax exempt federally owned real property are through provi- resource fund be allocated to the jurisdiction sions that authorize ad hoc payment programs wherein the lands lay, were recovered, or were for certain agencies' tax exempt property hold- used. The required shares or percentages cur- ings. rently range from 10% to 90% of gross program Currently, there are three major forms of pay- receipts. In addition, unlike the typical PILOT ments to local governments in this third cate- or formula-payment program, the receiving ju- gory of federal response: risdiction is frequently required to use these I) revenue or receipt-sharing payment pro- funds for specific purposes, such as schools, grams; roads, or environmental improvements. 2) payment in lieu of tax programs (PILOT); and Payments in Lieu of Tax (PILOT) Pro- 3) a variety of formula-based programs. grams. Of these, the components of the 'PILOT and formula-type programs are so diverse that, as a A large number of payment programs consequence, there are nine different program relating to government-owned tax exempt designs, all presumably intended to compen- property use a payment in lieu of tax approach, sate to some degree for the reduced tax base with several combinations of valuation and tax and the corresponding reduction in local gov- rate factors, to determine the amount of pay- ernment revenues andlor the change in local ment a locality is entitled to receive. Of the government expenditures. programs, 11 are of a fixed sum nature, three At present there are 57 different federal pro- provide for full tax equivalency, and four programs making direct payments to compensate vide for partial tax equivalent payments related for federally owned tax exempt real property. to the value of the tax exempt property: These programs contain provisions for 64 dif- 1. Payments based on a fixed sum. In this ferent payments to local governments, with a case, payment is a fixed, or flat, sum of total budget authority in 1979 of $2 billion. money paid to a locality on an annual There are 25 receipt-sharing payments, 18 basis. The payment is typically an arbi- PILOT-type payments, and 21 formula-based trary amount although, in some cases, it payments. The basic components of each are summarized here. may reflect a fixed amount of a tax liability as of a certain date, such as the date certain parcels of property were ac- Revenue or Receipt-Sharing Payments quired. Program. 2. Full tax equivalency payments. Payment Programs with this mode of payment are de- here is made on the full amount of real signed to share the revenues and receipts a property tax which would be due were state or the national government derives from the property fully taxable in private economic activities conducted on government- ownership. It provides 100°/o compensa- owned tax exempt lands within the boundaries tion for a property's tax liability, using of a state or locality. The sharing of receipts the taxing authority's normal valuation from natural resource recovery on mineral or or assessment practices, as well as the forest lands provides the most common source millage rates appropriate for that type of of payment, although the sharing of funds from property. activities on park lands-such as visitor and 3. Partial tax equivalency payments. These camping fees-is also widespread. Leases, fees, payments may be made on either a per- user charges, and severance levies may also be centage of the full value of the tax ex- shared with the local governments in which empt property or at a percentage of the the tax exempt lands are situated. rate of taxation for the tax exempt prop- The payment programs designed with erty, thus yielding a reduced effective receipt-sharing provisions are typically the tax rate (assuming normal assessment oldest of the operating programs and will spec- procedures), based on a smaller payment ify that a certain percentage of a land fund or than would have been due were the property fully taxable in private owner- A common and distinctive feature of formula ship. programs is their negotiated payment charac- This partial payment may be based (a) ter: they typically do not reflect a sophisticated upon a percentage of the land (actual cost analysis nor do they purport to fully reim- property) in a jurisdiction, or (b) upon a burse localities for community services. In- percentage of the value of real property stead, they represent a series of payments to in a jurisdiction. The actual percentage help defray local government costs. More im- of either basis may reflect that propor- portant, perhaps, is the abandonment of the tion which is attributable to the federal property-related basis for payment. As a result, government's current or past holdings in a property-based factor might be only one of the locality that is to receive the pay- several factors in a formula that is used to de- ment. The percentage is usually quite ar- termine a community's entitlement. Thus, the bitrary, however, with no firm conceptu- formula-based compensatory payment becomes al basis. a form of intergovernmental transfer or grant, Two additional measures frequently unrelated to its legislative intent as an in lieu used in partial tax equivalency programs of tax payment. are thresholds (or minimums) and ceilings (or lids) on payments made to local F. In general, existing federal grant governments. Presumably, the purpose programs are not designed to compen- of these devices is to minimize program sate subnational governments for rev- costs, eliminate the administrative costs enue losses which result from the fed- associated with smaller payments, or eral government tax immunity. eliminate perceived windfalls to certain communities with large amounts of tax In fiscal 1980 the U.S. government provided exempt lands. There are, however, seri- $89.8 billion in grants-in-aid (categorical plus ous equity and administrative defects in general revenue sharing) to state and local gov- these rationales, as will be discussed in ernments. That amount is approximately 31% greater depth later. of total state and local own-source revenue, and 16% of total federal outlay^.^ Given these Formula-Based Programs. magnitudes, the question surely arises as to The third major form of compensatory pay- whether this aid can be said to "make up" for ment program consists of a variety of alterna- the quantitatively much smaller statellocal real tive bases for payment by using formula mech- property tax losses resulting from the tax ex- anisms. At least four types of formula-based empt status of the federal government. programs can be identified among current pro- To answer this question, two others must grams that make in lieu of property tax pay- also be asked. First, what are the purposes of ments: federal aid? Second, do any of these purposes provide reasons for granting aid in the nature 1) a fixed fee per acre of government- of a payment in lieu of tax designed to com- owned land; pensate states and localities for federally cre- 2) a fixed fee per federal employee; ated real property tax erosion?1° ) cost-of-service computations, usually re- Recognizing the difficulty of making distinc- flecting a portion of the operation and tions between intended and actual purposes of maintenance costs of a local government grant programs, federal grants to state and lo- or service authority; and cal governments can be distinguished accord- ) various grants for community assistance, ing to whether they provide for social, econom- which are frequently targeted to certain ic, or financial needs. The purposes of each of local governments that are burdened these categories is briefly discussed below." with large amounts of capital expenditures due to rapidly expanding activities Social Need. The purpose of "social and service requirements on tax exempt need" Brants is to allocate resources to government lands. state and local governments in order to provide the mix of public goods and economic, and financial needs may be closely services Congress deems desirable and related to one another. Just as these needs or for which state and local governments problems are overlapping, so are the effects of are seen as the institutional units best the federal grant programs designed to address able to meet the requirements of their them. For example, both the General Revenue residents. Indicators of social needs in- Sharing and the Local Public Works Programs clude the percentage of poor families and target to both economic and financial need ar- individuals living in a jurisdiction, the eas. crime rate, per capita income, and mea- The important question for this discussion is sures of the quality of housing. The list whether any of these aid programs are also tar- of federal aid programs designed to ad- geted to state or local areas on the basis of the dress these social needs is enormous; property tax erosion effect due to the federal grants are provided for such programs as presence. The answer is no and is supported historic preservation, educational televi- on both conceptual and empirical grounds. sion, acquisition and alteration of senior First, the conceptual framework: although citizen facilities, civil defense and safety there is little doubt that many of the areas training, and housing rehabilitation and experiencing the economic, social, and finan- construction. cial problems are also those which provide the location for large amounts of nontaxable feder- Economic Need. These grants are provid- al real property, there are numerous fundamen- ed for areas experiencing structural eco- tal reasons for these "need" problems. Typical- nomic decline and are intended to ame- ly, factors such as reduced national population liorate the effects in these areas of a growth, reduced real costs of commuting with- declining economic base resulting from in metropolitan areas, changes in consumer business and residential migration be- preferences, adgances in consumption as well tween cities and suburbs andlor between as product technology, and the consequences regions of the nation. Indicators of eco- of federal policies which have promoted nomic need include changes in popula- suburbanization (e.g., the interstate highway tion (losses), per capita income, and the system, FHA mortgage insurance, and the employment composition (e.g., losses in deductibility of mortgage interest payments manufacturing relative to the service sec- from the federal income tax) can be identified tor) of the city. Community development as contributors to problems of need. grants (e.g., the Urban Development Ac- Certainly, the presence of federal tax exempt tion Grant, Community Development activities would be expected to aggravate some Block Grant), education, training, and of a community's problems-particularly those technical assistance are examples of the which are financial. Nevertheless, the fact re- federal assistance programs targeted to mains that, except in a relatively few extraordi- economic problems. nary situations where the federal government Financial Need. Financial need-oriented dominates a community tax base (e.g., Kitsap grants are made to governments-usually County, WA; Portsmouth, VA), the federal gov- urban-to help them cope with fiscal ernment's tax exempt presence is not a signifi- stress, which is manifested by indicators cant root cause of financial, social, or economic such as low liquidity, large debt, un- community distress. usually high tax efforts, and unbalanced These conclusions were borne out'by an em- budgets. Federal programs targeted to fis- pirical testing of the hypothesis that the value cal need concerns include General Reve- of federally owned real property is not signifi- nue Sharing, loan guarantees (New York cantly related to a community's social, eco- City) and growth impact grants. nomic, or fiscal health. In slightly more technical jargon: indicators of the various community Clearly any classification of problems and, needs were not shown to have a positive or therefore, of the general purposes of grant pro- negative association with the amount of federal grams, will be somewhat arbitrary, as social, tax exempt property in those jurisdictions. The major policy implication of this finding tax immunity violates public finance eq- is that existing federal aid programs are not de- uity criteria both when viewed as a pri- signed to address the problem of the erosion of vate (e.g., business enterprise) vs. public the real property tax due to the federal immu- (federal establishment) and from a feder- nity. Rather, they are designed to address other al leasehold vs. ownership viewpoint. problems of fiscal, economic, and social The taxation of institutions (government need-just as Congress presumably intends. Thus, if one accepts the conclusions stated agencies, business firms) is the most ef- before-that there are important tax-base ero- fective procedure available to local governments, both for assessing individuals, sion issues and tax policy inequities resulting wherever they may reside-for the bene- from the federal tax immunity-it follows that fits of public services accruing initially the solution to these problems is not found in to the institutional entity and for provid- federal grant programs as presently structured. ing tax signals regarding property utilization decisions. It follows, therefore, G.Authorization for either full real that the services of local government property taxation of the federal should be treated similarly to the ser- government or a full tax equivalen- vices of the private factors of production cy system of payments in lieu of real and that, in the interests of equity and ef- property taxes is an appropriate ficiency, their costs should be incorpo- policy response to the status quo. rated into the institution's cost structure. The foregoing conclusions regarding ACIR's Current federal grant-in-aid programs for examination of the characteristics of the federal subnational government do not address government's real property tax exemption can the tax base erosion and efficiency and be summarized as follows: equity concerns created by the federal The federal tax immunity is not Constitu- real property tax immunity. tionally guaranteed; rather, it could be Over the years, Congress has recognized modified or even completely removed by a responsibility to some local govern- an act of Congress. Moreover, removal of ments for making some form of special the exemption, either through the direct payment or in lieu of tax contribution to authorization of local (and, where it compensate local government for the fed- applies, state) taxation or indirectly eral presence. Despite this recognition, through the enactment of a federal pay- however, most federal agencies do not ment in lieu of taxes would be a natural make such payments. The result is a development rather than a radical depar- patchwork of uncoordinated and, quite ture from the evolving nature of the im- often, arbitrarily negotiated payment pro- munities doctrine. grams. Currently there are 57 special payment programs, with a total 1979 The exemption is quantitatively impor- budget authority of approximately $2 bil- tant from a tax base erosion or revenue lion. loss point of view. If one accepts (a) the general equity prin- In light of these findings, ACIR's research ciple of tax policy that taxpayers in simi- leads to the conclusion that the appropriate lar circumstances should be treated simi- federal policy response would be to authorize larly for tax policy purposes; and (b) the either direct local taxation of federally owned proposition that due to the inherent and used real property or enact a uniform sys- structural and fiscal constraints that tem of payments in lieu of taxes (PILOT) based characterize the local economy, local on full tax equivalency. The primary difference governments must rely heavily on the between a tax and a payment in lieu of tax is real property tax for general revenue pur- that the latter is technically designed as if it poses, then the existence of the federal were an unrestricted grant. With an in lieu of tax payment, the Congress Net Benefits. The most common of the acknowledges its fiscal responsibility for feder- PILOT-based alternatives to tax equiva- al tax immunity but, at the same time, avoids lency, designing a payment on some formally acknowledging its status as a "taxpay- benefit-cost criterion (e.g., discounting er." However, if properly administratively for the benefits of the federal establish- structured, the fiscal and economic effects of ment), falls apart when closely exam- an actual tax payment and a PILOT are much ined. There are at least three major rea- the same. sons for this conclusion: In the examination of the merits of using a a. A benefits adjustment violates the full real property tax equivalency base for guiding equity and efficiency princi- measuring the PILOT, several alternative pay- ples which assert that, by acquiring ment bases were examined. All are found to be federal property, the U.S. government inferior to the full equivalency approach. has assumed responsibilities similar to These alternatives and their major characteris- those of a private property owner; ap- tics are examined in Chapter 4 and are summa- plication of the net benefit test to pri- rized below: * vate taxpayers would destroy the en- Cost-of-Services. The narrowest prescrip- tire state-local real property tax tion for determining a PILOT, the cost-of- system. services-approach, which would com- b. The observable net benefits may exist pensate subnational governments for the only in the short run and are generally cost of federally used local services, en- comparable to those derived from sim- tails significant measurement and con- ilar private enterprises. ceptual problems. These include the major problems of the treatment of public c. Methodologically, the concept of a net goods consumed by individuals and in- benefit test for all federal facilities stitutions, the measurement of the mar- within local jurisdictions is not only ginal public costs (operating and capital) so complex and speculative as to raise made necessary by the federal presence, serious implementation problems, but, and the effects of federal expenditure in addition, where the "federal estab- mandates on state and local govern- lishment" can be said to have altered ments. Moreover, this "cost" view ig- the entire structure of a community, nores the practical reality that the real the benefits-cost criteria are altogether property tax, as the mainstay of local inapplicable. own-source revenues, must be used to fi- Fixed Formula or Fee. The fixed formula, nance some services which may have few whereby the PILOT would be made ac- "cost-of-service" characteristics. cording to a flat fee per employee (or some similar observable base), scores Discounting for Own-Provided Services. highest of all PILOT-based options on the The argument for discounting the PILOT by some percentage because the federal criterion of maximum Congressional con- government supplants some local ser- trol. However, the approach lacks any a vices by providing its own public ser- priori framework; its arbitrary nature vices has conceptual merit. However, fails to address the equity (e.g., lease vs. there are also numerous conceptual and ownership) concerns and fails to place a implementation problems. The most fun- tax price on federal property holdings, damental conceptual issue deals with thereby thwarting efficiency gains of a drawing a line between activities which PILOT. supplant and those which supplement lo- Threshold. The adoption of a "threshold cal services-a division that is likely to approach," under which a federal pay- be quite arbitrary. Methodologically, one ment would be made only if total federal is again faced with the problems of property values in a community ex- defining and measuring public costs. ceeded some specified percentage of total (or total plus federal) real property value, some operational, but not unusual, difficulties. ' has the administrative merit of disquali- In fact, the notion of the federal government re- fying a given set of small recipient local viewing and, when necessary, appealing the jurisdictions from the payment program. property tax (or in lieu payment) it would pay Beyond that, however, there is much to is not only not new; it is already an ongoing recommend against the threshold ap- process in some agencies such as the U.S. Post- proach. Not only would this method of al Service. In Canada, the federal review pro- determining the federal payment base cess has worked remarkably smoothly through thwart attempts to correct the inequities a federal real estate board. discussed above, it would also create a The federal government could establish a whole new set of inequities. Thus, it is new agency or office to determine the current virtually impossible to arrive at a logical value of each of the buildings, structures and basis for establishing a threshold per- facilities, and parcels of land it owns in the centage. U.S. This is unnecessary, however. The obvious and currently viable alternative is to rely H.Real property taxation of the federal on local governments to determine the level of government or a full tax equivalency the payment due, and then have the statellocal system of payments in lieu of real prop- unit send a tax or PILOT "bill" (in the form of a erty taxes is a workable policy re- grant application) to the federal government. sponse to the status quo. Moreover, this federal payment, whether it is Although implementation problems need to an unconditional grant or an actual tax pay- be worked out in establishing a tax equivalency ment, can be absorbed into local revenue struc- PILOT-as they would with any new tures as easily as are current property tax reve- levy-these problems are not a barrier to the nues. From an economic policy and establishment of a full real property tax equiva- operational views, as well as from a Congres- lency, federal to statellocal payment program. sional workload and oversight perspective, the This conclusion follows from the state of the enactment of a comprehensive uniform PILOT art of property tax administration in the U.S., would be best accomplished if, when autho- the similarity of federally owned properties to rized, it would at the same time replace several taxable privately owned properties and the of the existing ad hoc federal payment pro- practical workings of the 20-year old Canadian grams. system of real property tax equivalency PILOTS for federally and provincially owned real prop- RECOMMENDATIONS erty. * Administrative considerations involved in In light of these findings and conclusions, valuation and assessment procedures are not the Commission makes the following recom- an impediment to establishing a PILOT that mendations regarding the tax exempt status of uses existing local government taxing systems. federal and state-owned real property: The types of federally owned properties (usage categories) are fundamentally no different from Recommendation 1 those of properties now taxable. Thus, the bulk Improvement of the Inventory of Federal of federal properties will not present any spe- Real Property Located Within the cial valuation problems to the assessor. Indeed, United States. the current national trend is to require local inventory and assessment of tax exempt, includ- The Commission finds that there is a great ing government-owned real property. need for the U.S. government to develop pro- Administrative considerations regarding as- cedures which will permit the government as sessment.reviews and appeals may present well as the citizenry of this country to have a biennial estimate of the current value of federally owned real property in the United States. * Similar assessment review operations also operate smoothly in private companies which have large The Commission, therefore, recommends that amounts of real estate holdings throughout the U.S. the U.S. General Services Administration (or other agency designated by the Congress) es- The Commission further recommends that tablish permanent procedures to: the adoption of such a policy should be viewed as replacing rather than supplementing the ex- record the current value of all federally isting patchwork of in lieu of real property tax owned properties; payments, except for payments such as are require internally consistent reporting made on the basis of the exclusions noted requirements of all federal agencies-ci- above. vilian and military; and The Commission also recommends that this improve its recordkeeping on the actual policy be administered under established physical location of all government fa- statellocal procedures, including all provi- cilities. sions for administrative and judicial review of assessments, tax rules, and levies. Recommendation 2 The compensatory objective of the payment Congressional Authorization for a Tax in lieu of tax program is separate from all oth- Equivalency System of Federal er federal programs which provide general Payments in Lieu of Taxes on Federal and categorical assistance. It therefore should Real Property. not be linked to policy decisions regarding these other aid forms. The Commission finds that the current federal immunity from the real property tax not Recommendation 3 only leads to a significant erosion of the total state and local own-source revenue base but State Government Enactment of a Tax that it also leads to gross violations of the eq- Equivalency System of Payments in Lieu uity principle in public finance that taxpayers of Taxes on Federal Real Property. in equal circumstances be treated equally. The The Commission finds that the state pro- Commission, therefore, recommends that the grams which do compensate local govern- Congress authorize a program of payments in ments for the real property tax immunity of lieu of real property taxes to state and local state-owned property are, like those of the fed- governments in an amount equal to that which would be paid if the federal government were eral government, typically of a patchwork na- actually subject to the real property tax. The ture and lacking any guiding principle for uniformity in determining the level of a pay- payment base should be restricted to those fed- ment. Accordingly, the Commission recom- eral holdings not associated with open space mends that each state examine its own real properties which are at present covered under property tax immunity and consider authoriz- existing general receipts-sharing programs which the Commission recommends be contin- ing programs designed to fully compensate lo- ued. * cal governments for the revenues lost due to the exemption of state-owned real property. * Congressman Fountain did not participate in this recommendation because it is a matter within the legislative jurisdiction of the subcommittee he chairs.

FOOTNOTES 'ACIR, The Adequacy of Federal Compensation to Lo- cal Governments for Tax Exempt Land, A-68, Wash- ington, DC, 1978. 'U.S. General Accounting Office, The Federal Drive to Other properties without a county identification in- Acquire Private Lands Should Be Reassessed, clude some additional installations managed by the CED-8014, Washington, DC, U.S. Government Ac- Tennessee Valley Authority and the Departments of counting Office, December 1979,Cover 1. Agriculture, Justice, Interior, and Transportation. =U.S. Congress, Joint Economic Committee, Joint Eco- 5 Changes such as a downward adjustment of local tax nomic Committee Report on the 1969 Economic Re- rates and the replacement of the current $2 billion of port of the President, Washington, DC, U.S. Govern- in lieu of tax payments and special federal re- ment Printing Office, April 1969,p. 126. ceiptslrevenue sharing programs will reduce this estimated payment. This is discussed in detail in Chapter lo A possible third question as to whether this aid substi- 5.-. tutes for or stimulates statellocal spending is not ad- This program is discussed in Chapter 2. dressed here. For a review of that issue, see ACIR, Fed- L. Richard Gabler and John Shannon, "The Exemption eral Grants: Their Effects on State-Local Expenditures, of Religious, Educational, and Charitable Institutions Employment Levels, Wage Rates, A-61, Washington, from Property Taxation," in Research Papers Spon- DC, 1977. sored by the Commission on Private Philanthrophy This generally accepted division is used by Peggy L. and Public Needs, Vol. IV, "Taxes," Washington, DC, Cuciti, in City Need and the Responsiveness of Feder- U.S. Department of the Treasury, 1977, pp. al Grants Programs, a report to the Subcommittee on 2535-2572; ACIR, The Role of the States in Strength- the City of the Committee on Banking, Finance and ening the Property Tax, Washington, DC, 1963; Joan E. Urban Affairs, U.S. House of Representatives, 95th Towles, Financial Plan for the Pineland's Comprehen- Congress, 2nd Sess., Washington, DC, U.S. Govern- sive Management Plan, Vol. 11, Princeton, NJ, Govern- ment Printing Office, 1978. The definitions used by ment Finance Associates, Inc., 1980. Cuciti are essentially the same as those adopted here. See, however, a discussion and listing of state to local These definitions have also been adopted in a forth- payment in lieu of tax systems in 37 states in Volume coming report, Changing Conditions in Large Metro- 2 of this report. politan Areas, prepared by the Department of Housing 9ACIR, Significant Features of Fiscal Federalism, and Urban Development, Office of Policy Development 1979-80 Edition, M-123, Washington, DC, October and Research, for the Interagency Task Force on Urban 1980, p. 161. Data. Chapter 2

The Intergovernmental Framework: The Current Status of Federal Payments to State and Local Governments

Oneof the most distinctive and politically sensitive features of the US, system of fiscal federalism is the reciprocal intergovernmental tax immunities doctrine. Under this doctrine-a doctrine which has evolved over years of economic and political debate and judicial decisions often characterized by heated dis- sent-it is generally held that state and local governments may not tax the federal establishment and that, in turn, the federal government may not tax the instrumentalities of states and municipalities engaged in governmental activities. There is still a great deal of disagreement regarding both the extent to which this principle is abused by the Congress and the bureaucracy, and, also, the degree of "reciprocity" that actually exists in this arrangement. It is argued that, in practice, the doctrine protects the federal government against taxation by the states but does not equally shield the states against the taxing power of the federal government.' If the federal system were being designed today, the desirability of the immunities doctrine would be a proper area for debate; however, the focus would be on the doctrine's usefulness as a legislated policy tool and its tax base and equity implications rather than on its original constitutional justification as a device to protect the federal government from being "de- stroyed" by subnational taxation. Although a total redesign may be desirable, it is not of primary concern here. Nor, in fact, is law was as strong as it was discriminatory. It the validity or propriety of the immunities doc- provided that any bank operating in Maryland trine. What is of interest is an examination of without authority from the state could only is- the economic and fiscal effects of a major ele- sue bank notes on state-furnished stamped pa- ment of the doctrine-the exemption from real per upon which a fee varying with the denomi- property taxation of federally owned proper- nation of the note was paid. Failure to comply ties. Specifically, this study examines the issue subjected the offending banks' officers to fines of whether the federal government should of $500 for each violation. make payments in lieu of taxes (PILOT) for the The law was directed at the Baltimore branch statellocal revenues foregone because of the of the Bank of the United States. The cashier of real property exemption. Indeed, it should be that branch, James McCulloch, was sued for noted at the outset that, for this study, a PILOT issuing bank notes without complying with can be operationally viewed as a discretionary Maryland law. The Maryland courts upheld the federal grant and not as a direct tax-a distinc- state, but the US. Supreme Court reversed that tion which is necessary in order to avoid the is- decision. Speaking for the Court, Chief Justice sue of federal consent to taxation. Marshall wrote that in order to preserve the To reflect these concerns, this chapter pro- "great principle" that "the Constitution, and vides the initial conditions for the remainder of the laws made in pursuance thereof, are su- the report. The chapter is divided into three preme," the states had no power to levy taxes sections. that would "retard, impede, burden, or in any The first section reviews the major features manner control, the operation of the Constitu- of the intergovernmental tax immunity doc- tional laws enacted by C~ngress."~ trine as it applies to state and local taxation of To Marshall, the central issue was the need the U.S. government. This provides a legal for federal laws to take supremacy over state framework for understanding the underpin- laws. Thus, one state cannot impose upon, or nings of the economic policy issues addressed act to impair the legitimate actions of the feder- in subsequent chapters. al government because that subjects the will of The second part of the chapter discusses how the entire country to the will of the people of Congress has acknowledged the adverse effects one state.4 To allow that subjection, wrote of federal property acquisitions and expansions Marshall, would make federal laws subservient upon local governments by enacting various to state laws: statutory provisions which authorize some pay- [Tlhe power of taxation is an inci- ments to these local governments. . . . dent of sovereignty, and is coextensive Finally, the third section reviews several ma- with that to which it is an incident. All jor reports that have examined the tax exempt subjects over which the sovereign status of federally owned properties and some power of a state extends, are objects of in lieu of tax payment schemes. taxation; but those over which it does not extend are, upon the soundest JUDICIAL STATUS principles, exempt from taxation. This McCulloch vs. Maryland proposition may almost be pronounced self-evident.5 The doctrine that the federal government Thus a state can tax those things under its may not be taxed by a state or local government sovereignty (which Marshall defines as "every- has its origin in the Supreme Court's 1819 thing which exists by its own authority or is in- McCulloch vs. Maryland de~ision.~In 1816, troduced by its permission . . ."), but cannot the Congress chartered the Second Bank of the tax those things which are not under its power United States and opened several branches (such as federal operations). This conclusion throughout the states. In 1818, however, the raises two interesting points in the context of Maryland Legislature imposed a special tax on this study. First, inherent in this line of reason- all banks and branches in the State of Maryland ing is that if federal installations are not under not chartered by the legislature. The Maryland the sovereignty of a state or locality, a state or locality is not responsible for the support of though it continues to be an area for legal con- that federal in~tallation.~And, second is the tro~ersy.~ fact that, in McCulloch vs. Maryland, Marshall Current case law recognizes two justifica- distinguished a tax on property and interests tions for federal tax immunity. from a tax on the "operation" of the bank. Thus The first is the Constitutional immunity as Marshall declared that his holding- summarized above. At present, this Constitu- tional construction is narrowly restricted.10 . . . [did] not deprive the states of any The second basis for immunity is the Con- resources which they originally pos- gressional power to legislate immunity in areas sessed. It does not extend to a tax paid related to its Constitutional jurisdiction. l1 This by the real property of the bank, in amounts almost to a "discretionary" immunity, common with the other real property although it does ensure that a grant of Congres- within the state, nor to a tax imposed sional immunity cannot be implied any more on the interest which the citizens of than a grant of Constitutional immunity.'? In Maryland may hold in this institution, short, the federal government may be taxed in in common with other property of the any manner for which Congress, within its same description throughout the Constitutional limitations,13 consents. Thus the state.' federal government's tax exempt status, though derived from the Constitution, is primarily stat- Subsequent court decisions expanded this utory. It is not "unconstitutional" for states or doctrine of intergovernmental tax immunity to municipalities to tax the federal establishment the states8 and, at one point, from the primary as long as that taxation is not discriminatory. * immunity of the federal governmental activity As a policy matter, however, Congress has itself to the derivative immunity of third per- shown little interest in giving its consent to the sons who were in some way related to the gov- direct taxation of federal properties, limiting ernmental activities (e.g., federal employees that consent to the taxation of federally owned and lessees). corporations, federal credit and banking insti- Beginning in the late 1930s, however, the ju- tutions, and properties that are held by the fed- diciary began to sharply narrow the intergov- eral government pending disposition to private ernmental immunities concept. The progres- owners. sion since the 1930s from a broad to a narrow Indeed, a review of the statutory tax exemp- application of the immunities doctrine is evi- tions granted to several government corpora- dent. For example, in 1936, Congress, through tions reveals no clear Congressional policy. the Hayden-Cartwright Act, consented to state Generally, privately owned, Congressionally taxation of sales of gasoline and other motor created, "for profit" corporations (e.g., Conrail, vehicle fuels on federal enclaves when such COMSAT) have not been granted any tax ex- fuels were not used exclusively by the federal emptions. In addition, Congress has not, as a government. In the same year, the Congress general rule, exempted government corpora- also authorized the application of state work- tions such as Amtrak or the Federal Deposit In- men's compensation laws to federal areas. In surance corporation from payment of state and 1939 it provided for the application of state local real property taxes. Where an exemption unemployment compensation laws. The 1940 from real property taxes has been established, Buck Act permitted the states to impose sales, however, provision is frequently made for the use, gross receipts, and gross and net income corporation to make some payment to the state taxes on private persons within federal areas. and local jurisdictions in lieu of real property Nine years later, the Wherry Housing Act authorized state and local governments to tax the * This conclusion of nondiscriminatory treatment is implied from the Supreme Court decision in New York interest of private individuals who leased land vs. United States, 326 U.S. 572 (1946), that Congress on military reservations for the purpose of con- can tax state activities, but for it to tax these activities structing housing and renting it to military "while leaving untaxed the same activities pursued by private persons would do violence to the presupposi- personnel. Today, the direct primary immuni- tions derived from the fact that we are a nation com- ty, as stated by Justice Marshall, remains, al- posed of states." Ibid., at 575-76. taxes. Indeed, the U.S. Supreme Court has the economic, incidence.16 The incidence test made it clear that Congress has almost total generally applied in the courts is a mechanical discretion in determining the extent of govern- one: if the state tax legislation requires or urges ment corporations' tax immunity when it stat- that the tax be passed forward, the incidence is ed "it is not our function to speculate whether on the customer. Otherwise, the tax is on the the immunity from one type of tax as con- vendor. Where the federal government is the trasted with another is wise. That is a question customer, a sales or use tax cannot be levied in solely for Congress, acting within its Constitu- the former case. However, a nondiscriminatory tional sphere, to determine."14 tax on the vendor is permissible. With regard to other federally owned hold- Faced with this interpretation, the U.S. gov- ings, however, Congress has not granted con- ernment's response has often been to manipu- sent to taxation. Moreover, no direct statellocal late the terms of its contracts in order to shift taxation is permitted on the income, sales, or the legal incidence of the contractor's taxes to property of federal agencies and instrumentali- the government-despite the fact that most ties. contractors are private profit making businesses, which operate with little federal super- Derivative Immunity vision.'' Most commonly, this is accomplished by designating the contractor as the federal Although controversy abounds on almost ev- government's "agent "-something that can be ery aspect of the immunities doctrine, one of done by any one of the thousands of con- the most heated aspects of the debate pertains tracting agents in the federal bureaucracy, ei- to those instances in which third persons, rath- ther by arguing that formal regulations require er than the government as an institutional itl8 or by ignoring their own departmental poli- entity, derive the benefits of federal tax exemp- cies against such practice. tion. Perhaps the most familiar of these is the The controversy regarding the state tax lia- exemption from statellocal income taxation of bility of federal contractors has been, and will U.S. government bond interest paid to individ- no doubt continue to be, an unsettled area as uals and institutions. (A similar federal tax ex- long as there is a case-by-case adjudication of emption exists for the interest paid on state and the matter. Until Congress acts by passing leg- local bonds.) islation clearly defining the issue, the outcome There are, however, other similar cases of this issue will probably hinge on which worth mentioning, three of which are dis- side-federal or state-is the more creative in cussed below. They have been selected because writing its contracts or its tax laws. they represent the broad range of federal actions that have been detrimental to the taxing MILITARY PERSONNEL powers of specific subnational jurisdictions. The second representative case results from SALES TAX LIABILITY OF PRIVATE specific Congressional legislation combined CONTRACTORS with a bit of fiscal slight-of-hand. A provision in the Soldiers' and Sailors' Civil Relief Act of The federal government's use of private con- 1940 states that military duty pay can be taxed tractors on federal projects is enormous: in only by the state in which the armed forces 1979 it procured $94.4 billion worth of goods member is domiciled or is a legal resident.19 and services from contractors, the bulk ($70.4 The effect of the domicile-only jurisdictional billion) by the Department of Defense.15 The rule is that it provides an avenue of tax avoid- revenue implications for the states which have ance that is unavailable to civilians. Recent ex- large amounts of these tax exempt activities amination of the effects of this rule clearly would be substantial if state sales and use taxes indicates that large numbers of military per- were imposed. The key to whether or not those sonnel simply declare themselves legal resi- taxes may be imposed is the determination of dents of one of the nonincome tax states or of a the party on whom the tax is intended to fall, state which provides for full exemption of mili- or a determination of the legal, as opposed to tary pay.*O Figure I STATE INCOME TAX TREATMENT OF MILITARY PAY

Tax Treatment States

1. No broad-based state incoine tax. (nine states) Connecticut, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. 2. States with a broad-based state income tax, (five states) Alaska, Illinois, Michigan, Montana, but with a full exemption for military pay. and Vermont. 3. States with broad-based state income (nine states) California, Idaho, Missouri, New taxes, but which apparently do not tax mili- Jersey, New York, Oregon, Pennsylvania, Rhode tary pay if the member is stationed outside Island and West Virginia. the domicile state. 4. States with a partial-e.g., first $1,000 (seven states) Arizona, Arkansas, Indiana, -military pay exemption. Minnesota, North Dakota, Oklahoma, and Wisconsin. 5. States in which military pay is fully taxable. (twenty states and the District of Columbia) Alabama, Colorado, Delaware, Georgia, Hawaii, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Nebraska, New Mexico, North Carolina, Ohio, ' Three other states with such a provision-California, South Carolina, Utah, and Virginia. Oregon, and West Virginia-are excluded from this category because they already appear in group 3.

Figure 1 separates the 50 states and the Dis- problem is with the thousands of resale activi- trict-of ~olumbiainto five groups based upon ties operated by the federal establishment. The their income tax treatment of military pay. largest of these are within the Department of As noted, research has shown a statistically Defense. In 1940, Congress passed the Buck significant relationship between military domi- Act which allows state and local governments cile shifts and these tax status groups, as mea- to tax certain transactions that occur in federal sured over 1974-78. These changes occurred areas (e.g., repair services performed on base in response to state actions expanding or con- by a private contractor), but which specifically tracting state jurisdictional rules, following the excludes state and local taxation at commis- federal prohibition against withholding of state saries (grocery stores), exchanges (department income taxes from military pay enacted as part stores), clubs (restaurants), ship's stores, and of the Tax Reform Act of 1976.21 package liquor stores.22Because of the nature Military personnel are likewise exempt from of these resale activities, the benefit of the ex- state and local personal property taxes and au- emption accrues not only to persons on active tomobile license fees in the jurisdictions to military status and their dependents, but also which they are assigned. The effect of this ex- to retired military career personnel and their emption is a subsidy to military personnel by dependents. The various economic dislocations local residents. of this mandated tax exemption have been ade- A somewhat similar tax immunity for a given quately examined elsewhereSz3Suffice it to say class of federal employees also occurs with re- that not only does this exemption cause severe spect to state and local sales taxes. Here the revenue loss and even crime problems (boot- legging) for certain local communities; in addi- However, the Court has invalidated, as a trans- tion it directly harms private sector stores parent discrimination against the federal gov- which must compete with a military store. ernment and its lessees, a Texas levy which exempted private leases of property owned by the State of Texas or its subdivisions but sought to DISTRICT OF COLUMBIA tax private users of federal pr0perty.2~ HOME RULE ACT Despite the fact that it is legally permissible, there is some evidence that not all states have vigorously pursued this possibility. Indeed, in The third type of immunity-statutory-is 1969, the Public Land Law Review Commission directed toward the District of Columbia gov- recommended that the states recognize the op- ernment under conditions of that city's limited portunity to supplement conventional proper- "home rule" granted by Congress in 1975.24 ty tax revenues by taxing those intere~ts.2~A Under the act's terms, Congress specifically similar view regarding private property on prohibited the city council from taxing the per- land under exclusive federal jurisdiction was sonal income earned in the city by nonresi- recommended by the ACIR five years earlier. dents. Although this rule applies to federal and The Commission even went so far as to remind nonfederal employees alike (all residents of the states that they are free to deny-and have District, including federal employees residing denied-public services and facilities to per- in PC, do pay the tax), de facto, the effect is to sons living and working in areas under the ex- exempt 67% of the City of Washington's work clusive legislative jurisdiction of the national force, which is made up primarily of suburban g~vernment.~~ Maryland and Virginia c0mrnuters.~5In addition to this exemption, the Congress has man- CURRENT PAYMENT PROGRAMS dated Washington, DC income tax exempt status for its members, and their personal staffs if As a result of bureaucratic maneuvering, as they maintain domicile in that member's state, well as delegated authority from Congress and, and for the President and his appointees. more narrowly, the U.S. Constitution, the federal government's status as a tax exempt insti- POSSESSORY INTEREST tution is not only firmly intact, but that feature of our federal system is assured for the near fu- There is no constitutional impediment to ture. To change the entire immunities doctrine state and local taxation of possessory inter- would mean redesigning major parts of our ests-the taxation of private interests operating system of fiscal federalism. It is also true, how- on federal property-as long as it does not con- ever, that the federal establishment's tax immu- stitute a discriminatory tax against lessees of nity is detrimental, in that it has a quantita- federal property. In 1958 the U.S. Supreme tively significant effect of limiting the tax Court was asked to rule on a Michigan statute bases of state and local governments. If eco- that imposed a tax on private lessees and users nomic arguments warrant, Congress can pre- of tax exempt property when such property is serve the doctrine and yet alleviate the used in business conducted for profit. The statellocal fiscal effects by legislative action. Court upheld the Michigan contention that any Indeed, although the Congress has shown lit- taxes due were the obligation of the lessee or tle interest in giving its consent to direct taxa- user and that the U.S. government, as the prop- tion of federal agencies and instrumentalities, erty owner, was not liable for the tax payment; over the years it has recognized a responsibili- nor was the property itself subject to any lien if ty for reducing the direct effects of the federal the tax remained unpaid. Thus, once again, the tax immunity on some local government reve- key issue was the identification of the eligible nues by authorizing certain federal agencies to or "liable" taxpayer in the intergovernmental make ad hoc payments on their holdings of tax immunities debate, with the Court distinguish- exempt properties. Nevertheless, most federal ing between a tax for the beneficial use of prop- agencies are still without general authority to erty in contrast to a tax on the property itself.26 make such payments. Moreover, the existing payment programs are diverse, resulting in dif- er in this chapter, following a detailed analysis ferent treatment for similar properties. The out- of the components of these first three sets of come is a patchwork of uncoordinated and, programs. quite often, arbitrarily negotiated payment programs. Thus, although it has recognized the Shared Revenue and Receipts problem of making property tax related pay- Programs ments to state and local governments, the federal government has not developed a uniform Programs with this mode of payment are de- policy regarding this matter. signed to share the revenues and receipts the Currently, six different forms of ad hoc pay- national government derives from economic ment programs address the problems created activities conducted on government-owned tax by the tax exempt nature of federally owned exempt lands within the boundaries of a state properties. They are: or locality. The sharing of receipts from natural resource recovery on mineral or forest lands 1) revenue and receipt-sharing programs; provides the most common source of payment, 2) payment in lieu of tax (PILOT) programs; although the use of funds from activities on 3) a variety of formula programs; park lands-such as visitor and camping fees 4) property tax payments from federal cor- or grazing land-is also widespread. Leases, porations and financial institutions; fees, user charges, as well as severance levies, 5) the annual federal payment to the Dis- may also be shared with the local governments trict of Columbia; and in which the tax exempt lands are situated. 6) other payments, such as for administra- The oldest type of federal statellocal in lieu tive services. payment in the U.S., receipts-sharing, started Of these, the components of the PILOT and in 1802 with the sharing of revenues generated formula-type programs vary to the extent that, by sales of federal land with those states that de facto, there are actually 12 different pro- were gaining statehood and were located be- gram designs, all intended to compensate, to tween the western boundaries of seven of the some degree, for the reduced property tax base, 13 original colonies and the Mississippi River. the corresponding reduction in local govern- Those lands had been claimed by the colonies ment revenues, and the change in local govern- in their Colonial Charters and then ceded to the ment expenditures. Indeed, each program's leg- U.S. after the American Revolution. Then, in islative intent may specifically state its the 19th Century-operating under both the objectives as such. Some may even attempt to general philosophy that the federal government address or redress the more basic questions of should play a small role in economic affairs equity and efficiency which are raised by self- and the need for revenue-the U.S. adopted a imposed immunities. However, for reasons dis- policy of transferring its lands to private own- cussed. at length in Chapters 3 and 4, true ers and the states. This policy of land transfer "equivalency" to full taxation rarely exists. ended in 1891 when the Congress enacted a system for holding land in the federal public Major Federal Payment Programs domain. Between 1908 and 1964, the "modern" The lion's share of the payment programs, as receipt-sharing programs were enacted, their well as their associated funding levels, are rev- common denominator being ihat a certain per- enue and receipt-sharing, PILOT-type, and centage of a federal land or resource fund be al- formula-based programs. The first type in- located to the jurisdiction wherein the miner- cludes at least 25 programs (23 of which are als were located, recovered, or used. Although currently funded), which paid approximately some have been changed in the years since $800 million in FY 1979. There are 17 PILOT their enactment, the required shares or percent- programs and 21 formula-based programs (25 ages typically range from approximately 10% were funded), accounting for an additional to 90% of gross program receipts. The use of $1.2 billion of in lieu payments in 1979. The these funds also varies: some are to be used by remaining payment programs are discussed lat- the recipient local jurisdiction for specific pur- Table 1 FEDERAL SHARED REVENUES AND RECEIPTS PROGRAMS (1978-80) BA: Budget Authorization-BO: Budget Outlay

National Grasslands, Payments to Counties (Part of the Bank- BA 78: $ 1,228,000 head Jones Farm Tenant Act). 79: 1,250,000 25% of the revenues received from the use of national grass- 80: 1,300,000 lands is paid to the counties in which such land is located, for school and road purposes. 50 Stat. 522; 7 USC 1012 (1937).

Arizona and New Mexico Enabling Act. Arizona and New Mexico are paid a 3% share of national forest receipts for school purposes, in designated school section lands located in national forests. 36 USC 557, 562, 673 (1910).

National Forests Revenues Act With minor exceptions, 25% of all money received from national forests (both public domain and acquired), and certain amounts credited to timber purchasers for road construction, are paid annually to the states for public schools and roads of the county in which such forests are situated. 35 Stat. 251 ; 16 USC 500 (1908).

Materials from Federal Lands, Material Disposal Act. Included in DO1 "Payments to States for Proceeds of Sales," because ELM does not differentiate between the kinds of com- modities sold if the receipt-sharing formula is the same. (Interior payment is based on same percent as sales of public lands, and agriculture percent will depend on statutes under which land is administered.) 61 Stat. 681 ; 30 USC 601-603 (1947).

Payments to States for Flood Control Lands. 75% of money received from lease of federal lands acquired for flood control, navigation, and allied purposes is paid to the state in which such property is situated, for public schools, roads, or other expenses of county governments. 33 USC 701 C-3.

Army Corps of Engineers 25-75% of gross revenues are paid. 55 Stat. 650; 35 USC 761 t-1 (1961).

Federal Power Act FERC charges for the licenses it issues for hydroelectric projects which use federally owned lands. 37.5% of these revenues are then returned to the states in which these federally owned lands are located, disbursement being based on the number of acres of federal land used for these power purposes. The remaining revenues are allocated as follows: 50% to a reclamation fund and 12.5% to the US. Treasury (sections 10e and 77 in the Federal Power Act). 41 Stat. 1063; 16 USC 810 (1920). Table I (Cont.) FEDERAL SHARED REVENUES AND RECEIPTS PROGRAMS (1 978-80) BA: Budget Authorization-BO: Budget Outlay

Taylor Grazing Act. (a) States are paid 50% of grazing fee receipts from public domain lands outside grazing districts. 48 Stat. 1269; 43 USC 315, 315m (1936).

(b) States are paid 12.5% of grazing fee receipts from these lands within grazing districts. 43 USC 315b, 3151 (1936).

Payments to States from Grazing Receipts, Etc., Public Lands within Grazing Districts, Miscellaneous. States are paid specifically determined amounts from grazing fee receipts from miscellaneous lands within grazing districts when payment on a percentage basis is not feasible. Payments to states and the range improvements fund are derived from statutory percentages of collection receipts in the prior fiscal year from grazing of livestock on public lands, and grazing and mineral leasing receipts on Bankhead Jones Farm Tenant Act lands transferred from USDA bv various executive orders. On ~ublic lands, the grazing fee inclides a range improvement fee which is available for range improvements and maintenance of ranae facilities when appropriated. 43 USC 315, 1701.

Payments to States for Proceeds of Sales, Various Statutes. The states are paid 5% of the net proceeds from sale of public land and public land products, shared with states in which land is located. Originally provided for admission of new states in the Union. 31 USC 71 1 (1802-1958).

Oregon and California Revested Railroad Grant Lands, Payment to Counties. 50% of the receipts of Oregon and California land grant funds are paid the counties in which the lands are situated, to be used as other county funds. 39 Stat. 218. After administrative and general fund costs in Treasury are reim- bursed by receipts, the remainder of the fund is paid to the counties in the same manner as the original 50% payment. 50 Stat. 875, 876, 43 USC 1131f; 43 USC 1701, et seq (1916).

Information not available concerning classificationas BA or 80. NOTE: Abbreviations used are: U.S. Department of Agr~culture.Forest Service (USDA, FS); Department of the Interior. Bureau of Land Management (DOI. BLM); Department of Defense (000); U.S. Army Corps of Engineers (COE); Department of Energy Federal Energy Regulatory Commission (DOE, FERC); Bureau of Reclamation (BOR); Tennessee Valley Authority (TVA); Depa;tment of Commerce, National Oceanic and Atmospheric Administration (DOC, NOAA); Farmers Home Administration (FmHA). National Park Service (NPS); Health, Education, and WelfareIDe~artmentof Education, Oflice of Education (HEWIDED. OED); ~ousin~and prban Development (HUD); Department of Transportation (DOT): and Veterans Administration (VA). Table 1 (Cont.) FEDERAL SHARED REVENUES AND RECEIPTS PROGRAMS (1 978-80) BA: Budget Authorization-BO: Budget Outlay

Mineral Lands Leasing Act, Payments to States. BA 78: $175,134.000 79: 202,043,000 Alaska is paid 90% and other states 50% of the receipts from 80: 238,579,000 bonuses, royalties, and rentals resulting from development of BO 78: 188,478,000 mineral resources under the Mineral Leasing Act, and from 79: 224,000,000 leases of potash deposits on public lands. 80: 238,629,000 40 Stat. 437: 30 USC 191. 285.. 286. . 292. Payments also include those collected under Mineral Leasing on State-Selected Indemnity Lands, for Arizona and Utah because of their small amounts ($240 and $2,000 respectively). 74 Stat. 1024.

Payments to Oklahoma. Oklahoma is paid 37.5% of the Red River oil and gas royalties in lieu of state and local taxes on Kiowa, Comanche, and Apache tribal lands, to be used for construction and maintenance of public roads and support of public schools. i65 Stat. 252; 44 Stat. 740-1 ; 42 Stat. 1448-9.

Oil and Gas Lands Added to the Navajo Indian Rese~ationin Utah. 47 Stat. 1418.

Boulder Canyon Project. Total development fund for: The project makes a flat PILOT except for portions of the Col- BA 'B0 78: 500,000 orado River development funds, derived from power sale rev- 79: 500,000 enues, which may be appropriated and spread equally among 80: 500,000 river basin states, also allowing New Mexico's share to be available for the San Juan transmountain diversion project. 45 Stat. 1957; 43 USC 617c, 618; and Secs. 2(c) and (d) of the Boulder Canyon Project Adjustment Act of 1949 (1940).

National Grasslands, Payments to Counties. Part of Bankhead Jones Farm Tenant Act. Of the revenues received from the use of these submarginal lands, 25% is paid to the counties in which such land is situated, for school and road purposes. 50 Stat. 522; 7 USC 1012 (1937).

Revenue from Excise Tax on Certain Sport Fishing Tackle. No less than 92% of the 10% excise tax on certain sport fishing tackle is appropriated to the states, Puerto Rico, Guam, the Vir- gin Islands, and American Samoa. Additional funds may be appropriated for specified conservation and management activities and agreements between two or more states. 16 USC 777a-k.

Revenue from Excise Tax on Certain Firearms No less than 92% of the 11% excise tax on sporting arms and ammunition, 10% excise tax on handguns, and 11% tax on certain archery equipment is appropriated to the states. Puerto Rico, Guam and the Virgin Islands, for wildlife restoration. 16 USC 669-6691, Table 1 (Cont.) FEDERAL SHARED REVENUES AND RECEIPTS PROGRAMS (1 978-80) BA: Budget Authorization-BO: Budget Outlay

DO1 National Wildlife Refuge Act, Migratory Bird Conservation Act. (Bureau The Refuge 'Revenue Sharing Act authorized the distribution of of Sport 25% of the revenues from the sale of products from the national Fish- wildlife refuge system to be allocated to counties in which the eries refuges are located for the benefit of public schools and roads and and for lands acquired in fee, either payment of 25% net receipts Wild- of same, or 0.75% of the current value less improvements of lWe) such areas (set at 5-year intervals), also for schools and roads. 78 Stat. 701; 16 USC 695m, 715s (1964).

Klamath National Wildlife Refuge Act. 25% of net revenues from leasing the Klamath reclamation project and the reserve federal lands within certain national wildlife refuges (including the Tule Lake National Wildlife Refuge) is paid to the counties in which the refuges are located. Payment per acre cannot exceed 50% of the average per acre tax levied on similar lands in private ownership in each county, may not reduce the credits or payments to the Tule Lake irrigation districts already committed, and must have third prlority for disbursement after the latter and the Klamath Drainage District payments. 78 Stat. 850; 16 USC 695 (1964).

GrantslPayments to States from Reclamation Fund Revenues. With approved reclamation programs and project plans, a state is entitled to a minimum of 50% of fund revenue derived from operating mines in the states. Surface Mining Control and Reclamation Act of 1977.

Payments to States for Mineral Leasing on State Selected Indemnity Lands. 90% of rents and royalties on the selected lands are paid to the states. Payments are included in Mineral Leasing Act payments. 74 Stat. 1024; 43 USC 852 (1960).

Mineral Leasing on Acquired Lands. Provides for 65% of the receipts from miscellaneous minerals re- 79 (est): 2,750,003 ceipts acts to go straight to Treasury; 10% to the Forest Service 80 (est): 2,800,000 for improvements on the leased lands; and 25% to statelcounty fund. 61 Stat. 915; 30 USC 355 (1947).

Information not available concerning classification as BA or 80. NOTE: Abbreviations used are: U.S. Department of Agriculture. Forest Service (USDA. FS); Department of the Interior. Bureau of Land Management (DOI. BLM); Department of Defense (DOD); U.S. Army Corps of Engineers (COE); Department of Energy, Federal Energy Regulatory Commission (DOE. FERC); Bureau of Reclamation (BOR); Tennessee Valley Authority (TVA); Department of Commerce. National Oceanic and Atmospheric Administration (DOC, NOAA); Farmers Home Admintstration (FmHA). National Park Service (NPS); Health, Education, and WelfareIDepartment of Education, Oflice of Education (HEWIDEO. OED); ~ouAin~and Urban Development (HUD); Department of Transportation (DOT); and Veterans Administration (VA). SOURCE: AClR staff comDilation. Table I (Cont.) FEDERAL SHARED REVENUES AND RECEIPTS PROGRAMS (1978-80) BA: Budget Authorization-BO: Budget Outlay

Yellowstone National Park, Education Expenses for Employees' Children. Short-term Dark recreation fees are used to Drovide educational facilities to pupils who are dependents of persons engaged in the administration, operation, and maintenance of Yellowstone Na- tional Park. Payments have been made to a special school district within the park since 1948. 62 Stat. 338; 16 USC 40a. Payments for Use of National Forests and Public Lands. 77: 218,297.25 37.5% of the revenues collected from the use of national forests (collected in 1978) and public lands (usually vacant public lands; those being with- 78 held from development) are paid to the states in which such (15% increase in funds estimate lands are located. These moneys, which are collected by ELM, based on a change in the method of are actually distributed the year after their payment is due (which computation for the aggregate fund is common for receipt-sharing programs). and an increasing amount of hydroelectric dams on these lands): 16 USC 810.

(10% increase est): 80 289.953.32 (5% increase est):

Payments to the Farmer's lrrigation District, North Platte Project, Nebraska-Wyoming. Payments are made to the Farmer's lrrigation District on behalf of the Northport lrrigation District for water carriage. The Interior Reclamation Fund covers these annual payments, the authority for which shall expire when the total of such payments is $479,602. (Parts of the payment are considered an annual construction charge installment.) The Northport District has relin- quished to the U.S. its interest in power revenues and power facilities for those facilities constructed by the US., although the water carriage is owned by the farmers in the district. 62 Stat. 273, as amended. Payments from Proceeds from Power Sales. Section 13 of the TVA Act provides for TVA to pay annually to certain states and counties 5% of its gross revenues-not less than $10,000 to each state-from the sale of power in the preceding fiscal year, excluding revenue from power sold to federal agencies or a two-year average of state and local taxes last assessed prior to TVA acquisition. Payments to affected cwnties are made before making payments to states. 48 Stat. 58; 16 USC 831 (1933).

Information not available concernmg classification as BA or 80. NOTE: Abbreviations used are: U.S. Department of Agriculture, Forest Service (USDA. FS); Department of the Interior, Bureau of Land Management (DOI, BLM); Department of Defense (DOD); U.S. Army Corps of Engineers (COE); Department of Energy, Federal Energy Regulatory Commission (DOE. FERC); Bureau of Reclamation (BOA); Tennessee Valley Authority (TVA): Department of Commerce. Nat~onalOceanic and Atmospheric Administration (DOC, NOAA); Farmers Home Administration (FmHA): National Park Servlce (NPS); Health, Education, and WelfareIDepartment of Education, Office of Education (HEWIDED. OED); Hous~ngand Urban Development (HUD); Department of Transportation (DOT); and Veterans Administration (VA). SOURCE: AClR staff compilat~on. poses such as schools, roads, or environmental Full Tax Equivalency Payments iinprovements, while other provisions allow the states to determine their proper use and al- In this form, payment is made on the full location. The concept behind the receipt- amount of real property tax that would be due sharing programs was a common concern over were the property fully taxable in private own- the withdrawal of large amounts of land and its ership. It provides 100% compensation for a attendant economic activity from local tax bas- property's tax liability, using the taxing au- es. Table 1 lists each of these programs, the thority's normal valuation or assessment prac- authorizing statutes and administering agency, tices as well as the millage rates appropriate and presents a brief summary of the nature and for that type of property. size of payments. Only U.S. Department of Housing and Urban Development and Veterans Administration Payments In Lieu Of Taxes payments on acquired properties due to foreclosures and certain payments of federally Another large group of payment programs owned corporations actually have "full" tax relating to federally held tax exempt property equivalency. In this situation, payments are uses a payment in lieu of tax approach, with made as if the federal government were a pri- ' several combinations of valuation and tax rate vate taxpayer subject to state-local property factors, to determine the amount of payment a taxation. locality is entitled to receive. This category includes many of the better known recent pay- Partial Tax Equivalency Payments ment schemes, such as the PILOT Act of 2976 (P.L. 94-565). In fact, there are at least 18 PI- These payments may be made on either a LOT programs, their most common feature be- percentage of the full value of the tax exempt ing their ad hoc, uncoordinated nature. These property or at a percentage of the rate of taxa- PILOTS are presented in Table 2 and can be tion for the tax exempt property, thus yielding classified as reflecting one of three types of a reduced effective tax rate (assuming "nor- payment: 11 programs are of a fixed sum na- mal" assessment procedures) based on a ture, three provide for full tax equivalency, and smaller payment than that which would be due four provide for partial equivalent payments were the property fully taxable in private own- related to the value or amount of the tax ex- ership. empt property. Understanding these three pay- This partial payment may be based (a) upon a ment schemes is important to understanding percentage of the federal land to total land area the findings and recommendations of this re- in a jurisdiction, or (b) upon federal to total ra- port and its policy alternatives for achieving tio of the value of real property in a jurisdic- greater equities in federal payment programs tion. The actual percentage of either basis may for real property. Accordingly, each is briefly reflect that proportion that is attributable to the reviewed below. federal government's current or past holdings in the locality that is to receive the payment. Fixed-Sum Payments Usually, however, the percentage is quite arbitrary, often only reflecting a gap between a ful- In this case, a fixed, or flat sum of money is ly or partially funded program. paid annually to a locality. The amount is typi- Two additional characteristics frequently cally an arbitrary one, although, in some cases, found in a partial tax equivalency program are it may reflect a fixed amount of a tax liability thresholds (or minimums) and ceilings (or lids) as of a certain date, such as the date certain on payments made to local governments. parcels of property were acquired. Thus, the payment may be a percentage of One example of this flat fee approach is the full current tax equivalency, ranging from 75% Boulder Canyon Project, where Arizona and of appraised value (e.g., Superior National For- Nevada each receive $300,000 for each year of est land payments to Minnesota) to a set per- operation of the Hoover Dam. This fixed pay- centage of the property's value at the time of ment was specified in the PILOT'S enacting acquisition (e.g., as included in one section of legislation (1938) and is to expire in 1987.30 the 1976 Payments In Lieu of Taxes Act). Or, fixed fee lids may be combined with communi- intergovernmental transfer or grant than an in ty assistance payments for special capital and lieu of tax payment. operating costs (e.g., payments to atomic ener- The formula-based programs are frequently gy communities) or with components of reve- used in conjunction with other receipt-sharing nue and receipt-sharing programs. or partial tax equivalency payment programs. Presumably, the purpose of both of these de- However, the reasons for enacting these pro- vices is to minimize program costs, eliminate grams, as with all the other compensatory pay- the administrative costs associated with small ment programs, have not been uniform or com- payments, or eliminate perceived windfalls to prehensive. Because this group involves by far certain communities with large amounts of tax the largest expenditure of PILOT pro- exempt lands. There are, however, serious eq- grams-almost $1 billion in FY 1979-several uity and administrative defects in these ratio- of the major operating payment programs are nales, as will be discussed later in greater discussed in greater depth at this time. They depth (Chapter 4). are also included in Table 2. FORMULA-BASED PROGRAMS Fixed Fee Per Acre The third major form of compensatory pay- The most comprehensive of all federal payment consists of a variety of alternative bases ment programs are the fixed fee payments for payment by using formula mechanisms. At made under the Payment In Lieu of Taxes Act least four major types of formula-based pro- of 1976 (P.L. 94-565, as amended in 1976, grams can be identified among current pro- 1978, and 1979). This program covers federal grams that make in lieu of property tax pay- land in more than 1,500 counties (mostly in the ments: western U.S.) and supplements nine different receipts-sharing laws that provide compensa- a fixed fee per acre of government-owned tion to these counties. The supplement guaran- land (two programs); tees that total federal payments to a county cost-of-service computations, usually re- meet certain per acre minimums and maxi- flecting a portion of the operation and mums. P.L. 94-565 provides that each county maintenance costs of a local government will receive an additional lo@ per federally or service authority (eight programs); owned acre over the combined payment under a fixed-fee per federal government em- all payment programs, or 75q per federally ployee (one program); and owned acre, whichever is greater. The 75$ and various grants for loans and guarantees lo@per acre standards are modified for coun- for community assistance, which are fre- ties with small populations by setting a max- quently targeted to certain local govern- imum per capita payment. Forty-five popula- ments that are burdened with large tion categories are established. For counties amounts of capital expenditures for rap- with populations under 5,000, the limit is $50 idly expanding activities and service re- per capita. At the other extreme, the limit is quirements on tax exempt government $20 per capita for counties with populations lands (seven programs). over 50,000. No payment under P.L. 94-565 A common and distinctive feature of formula may exceed $1 million. However, because the programs is their negotiated payment charac- Bureau of Land Management has had to inter- ter: they typically are not guided by any gener- pret vague terms and definitions of entitlement al economic principles, nor do they purport to lands as well as use some state data which have reimburse localities fully for the cost of public been unreliable for computing state-local pay- services. More important, perhaps, is the aban- ments, large portions of PILOT payments have donment of the property-related basis for pay- not been made in the last two years. ment. Indeed, a property-based factor might be Despite such administrative problems, how- only one of several factors in a formula which ever, the 1976 PILOT Act was supplemented in is used to determine a community's entitle- 1978 by the Redwood National Park Expansion ment. Thus, the formula-based compensatory Act and the Refuge Revenue Sharing Act payment becomes more a politically negotiated Amendments, which added additional entitlement lands to the payment program. The Red- districts for the imposed expense of educating wood Park Act also included additional reve- the children of federal employees where the lo- nue benefits for persons aff-ected by the cal tax base is reduced because of federal prop- removal of certain industries from the newly erty ownership and where enrollments are acquired park land. The changes effected by raised by the presence of a federal installation. these two acts exacerbated the original act's The principal basis on which these payments administrative problems noted above. As can are made is a function of the number of public be seen in Table 2, the result of these inter- school children who reside on tax exempt fed- pretive problems has been a budget outlay eral property and who live with a parent who is somewhat larger than the program budget ap- employed on that land. In 1970-71, this defini- propriation for the past two fiscal years.31 tion of federal property was amended to include low rent housing (whether or not owned Cost-of-Service Computations by the U.S. government), which is part of a Eight of the current PILOT programs make low rent housing project assisted under the payments to jurisdictions with federally owned United States Housing Act of 1937. * real property for some of the operating costs of There are three payment provisions under certain community facilities. These may take P.L. 874, the maintenance and operation por- the form of general revenue contributions for tion of the impact aid program: section 2 deals services "above and beyond what would nor- with real property acquired by the federal gov- mally be rendered. . .," as TVA has made to ernment; section 3 addresses the number of Norris, TN. Alternatively, contracts and school-age children whose parents live on fed- cooperative agreements can be arranged with eral land andlor work for a federal employer; localities to provide cost reimbursements for and section 4 addresses sudden and substantial specific services. The Bureau of Land Manage- increases in school attendance. However, payment and the Forest Service have had this type ments have not been made under section 4 for of arrangement with several jurisdictions for several years and section 3 payments, by far the law enforcement services for several years. largest component of the program, are dis- As was true for formula-type programs, pay- persed through a complicated three-tiered "pri- ments designed as "cost-of-service" programs ority" process. Moreover, total program outlays are often negotiated rather than reflective of are being reduced by large amounts each year any cost analysis; nor do they purport to fully as a matter of federal policy. reimburse localities for community services. The section 3 payments distinguish between Rather, they represent a series of voluntary two broad categories of children: 3a children, payments from certain agencies which expect whose parents live and work on federal prop- "heavy" service provision. No attempt is made erty; and 3b children, whose parents live or to determine, or even address, the question of work on federal property. Each of these cate- the quality or quantity of community services a gories also contains subcategories of children tax-free entity can expect. eligible for impact aid, such as military and low rent housing childen. These categories are then Fixed Fee Per Person used to establish different entitlement rates in Only one program provides federal payments the program's authorized funding level, osten- on a fixed fee per employee basis-the Federal sibly to reflect the relative amounts of tax reve- Impact Aid Program administered by the De- nues foregone by local school districts. For ex- partment of Education. The Impact Aid Pro- ample, entitlement on the basis of 3a children's gram, also the largest and probably most con- entitlement rates ranges from 90% to 150% of troversial of the existing payment in lieu the local contribution rates, whereas programs, was enacted through Public Laws entitlement on the basis of 3b children ranges 81-815 (construction aid based on increases in from 40 to 50%. Authorized funding levels are enrollment) and 81-874 (maintenance and operation aid based on numbers of federally con- nected children). Initiated in 1950, it was origi- * This authorization was provided through P.L. 81-874, nally intended to help compensate school which is broader than P.L. 81-815. Table 2 FEDERAL PAYMENT IN LIEU OF TAX AND FORMULA BASED PROGRAMS (1978-80) BA: Budget Authorization-BO: Budget Outlay

USDA Lands Acquired for Certain Public Works. Primarily Designated (FS) Watersheds. The 1944 act, P.L. 534, provides for the construction of post- World War I1 public works on rivers and harbors for flood control purposes. Provision is made for payment to the county in which lands acquired under this law may lie, of a sum equal to 1 % of their purchases price or, if not acquired by purchase. 1 % of their valuation at acquisition. 58 Stat. 387,905; 33 USC 701-1; 16.

No payments have been made under this program. USC 1006. USDA Superior National Forest Land, Payment to Minnesota. (FS) At the close of each fiscal year, Minnesota is paid 0.75% of the appraised value of certain Superior National Forest Lands in the Counties of Cook, Lake, and St. Louis for distribution to these counties. Land is reappraised every ten years. 62 Stat. 568; 16 USC 5772, (1948). USDA Payments to Local Governments. (FS) The Forest Service has a long-term policy of paying for cooperative law enforcement (with local governments) on land it ad- ministers. USDA Case-Wheeler Act Lands. & This act establishes the authority of the Secretary of the Interior DO1 over certain lands, contracts, water rights, etc. (and their acquisition, exchange, and disposition) and includes these lands as part of the USDA forest fund and bird wildlife refuge funds although their respective receipts (and receipt-sharing programs) are not collected under this specific authority. 54 Stat. 11 25; 16 USC 5902-8.

DOC Community Energy Impact (CEI) Formula Grants. 10,000.000 (NOAA) 15,000,000 In response to federally owned Outer Continental Shelf resource 17,500,000 development which will not benefit the states through any lease 27,500,000 bonuses or royalties from resource recovery, the Coastal Zone 27,500,000 Management (CZM) Act was amended to provide grants to eligible states for state and local public infrastructure development, - correction of environmental damage caused by offshore energy 10,000,000 development and compensation for onshore public facilities built 20,000,000 to meet anticipated community needs resulting from planned, 53,000,000 short-term or long-term energy development and resource ac- carried into tivities. The formula for distribution has been based upon each the FY; prob- year's private lease sales and the amount of employment de- ably will use velopment in each state. A 2% floor (threshold) and 35% ceiling 25,000,000. (of costs) are to be provided to each state. Appropriation under the program has been slow because states have been slow to utilize the funds, which must be based in part upon each state CZM plan, energy plans, and approved environment impact statements (EIS) for onshore and offshore energy activities. As a result, the FY 80 outlays are actually old appropriations from the previous two years. Section 308, CZM, Amendments of 1977. Table 2 (Cont.) FEDERAL PAYMENT IN LIEU OF TAX AND FORMULA BASED PROGRAMS (1 978-80) BA: Budget Authorization- BO: Budget Outlay

DOC Community Energy Impact Fund (CEIF). (NOAA) Also passed, as part of Section 308 of the CZM Amendments of 1977: a separate fund for loans, guarantees, and grants earmarked for specific research or government use. Loans and guarantees at reduced rates of interest are made to BA 77: $110,000,000 states for public facilities built in response to on and offshore 78: 110,000,000 impacts of Outer Continental Shelf (OCS) development. Here 79: no funds, again, the states have been very slow in using the funds made using old ap- available for this program, due to CZM and environmental impact propriations. statement requirements and to slower than anticipated develop- 80: old appropria- ment of offshore activities. The same formula for distribution is tions. used here as that used in the CEI Formula Grants described (Est. 70,000,000 to be above. used in 80) OCS State Participation Grants are also part of the CEIF, although they were new in 1979. Under this program, states receive matching grants to work with the federal government on their lease sales, study the problems associated with OCS development, and anticipate the need for and program for public facilities. Presently there is no appropriation for this program; balances carried over from the loan program will be used instead, up to $3,000,000. Planning grants are also provided in the CEIF to assist state and local governments in the use of their loan and grant moneys. State and local governments are to use the planning grants to analyze the impacts of site specific energy activities. Again, the FY 79 and 80 appropriations are reprogrammed from loan appropriations, which are carried over. Environmental grants are provided under section 308(d)(4) of the CEIF, although the formula for the distribution of the funds was changed in 1979 so that the planning and environmental grants are considered together. The recent changes have refocused the grants for those states which have no other community energy impact funds; the practical effect of this is to target the funds to the Great Lakes states and Hawaii. The FY 80 and 81 appropriations under this program are also from the unused loan appropriations. A program management grant for OCS impacts is also provided as a separate line item under Section 318, to be funded from unused loan funds in FY 80. TOTAL CEIF While actual outlays may vary due to funding through 77-78 loan "carryovers," total budget authorizations are actually substantial.

1' Information not available concerning classtficatton as BA or 80. NOTE: Abbreviations used are: U.S. Department of Agriculture, Forest Service (USDA, FS); Department of the Interior, Bureau of Land Management (DOI, ELM); Department of Defense (DOD); U.S. Army Corps of Engineers (COE); Department of Energy. Federal Energy Regulatory Commission (DOE. FERC); Bureau of Reclamation (8017); Tennessee Valley Authority (TVA); Department of Commerce. National Oceanic and Atmospheric Administration (DOC. NOAA); Farmers Home Administration (FmHA); National Park Servtce (NPS): Health, Education, and WelfareIDepartment of Education. Office of Education (HEWIDED, OED); Housing and Urban Development (HUD); Department of Transportation (DOT); and Veterans Administration (VA). SOURCE: AClR staff compilation. Table 2 (Cont.) FEDERAL PAYMENT IN LIEU OF TAX AND FORMULA BASED PROGRAMS (1978-80) BA: Budget Authorization -60: Budget Outlay

Atomic Energy Communities. * 79: $ 9,079,000 80: 8,672,000 Atomic energy communities (primarily Los Alamos, NM, Oak- 81 : -. ridge, TN, and Richland, WA) receive community assistance payments for capital and operating costs, "special burden," and lump sum payments, as well as limited PILOT for their original residential/commercial areas which were taken by the federal government. Payments to state and local governments were authorized under Section 9b of the AEC Act of t946 and 1954 and Section 91 (a) of the AE Community Act of 1955 (P.L. 84-221) and are made at the department's discretion. 60 Stat. 765; 42 USC 2208 (1946). Energy Development Impact Assistance Program BA 79: 20,000,000 80: 50,000,000 Section 601 of the Powerplant and Industrial Fuel Use Act of 1978 authorizes this program by reallocating funds for the fed- 81: 150,000,000 (assumes eral government or certain local governments to purchase land and make the necessary improvements on it, with certain com- new legisla- munity facilities, to meet national energy needs. Most recent ap- tion) propriations are for planning. The President's energy legislation would replace this program with Inland Energy Impact Assis- tance, at a proposed budget of $150,000,000 per year from 1981-85. Appropriation is to DOE and then transferred to USDA.

Colorado River Dam Fund, Boulder Canyon Project. Annual payments of $300,000 each are made to Arizona and Nevada from operation of the Boulder Canyon project. 43 USC 618a and Sec. 2(c)(d) of the Boulder Canyon Project Readjustment Act of 1940 (1940). Columbia Basin Project Lands. Annual PILOT to state or substate jurisdiction for lands situated therein, from funds derived from leasing such lands, not to exceed the taxes due were the property not tax exempt. These lands are subject to assessment and taxation, although the US. has no obligation to pay such taxes. However, if these lands are under contract of sale, they may be taxed in the same manner as privately owned lands of a similar character. GAO notes that the basis of the payment is the result of negotiation between the Secretary and local officials. 54 Stat. 14; 16 USC 835(c) 1 (1937, 1961). Payment for Tax Losses on Land Acquired for Grand Teton Na- BA 78: 24,000 tional Park. 80 78: 23,000 BA & B0 79: 25,000 Revenues received from fees collected from visitors are used to BO 80: 25,000 compensate the State of Wyoming for tax losses on Grand Teton and Yellowstone National Park lands, not to exceed 23% of receipts of the park in any one year. 64 Stat. 851 ; 16 USC 406d-3 (1950). Payments to Local Governments. BLM is authorized to enter into contracts and cooperative agreements for law enforcement in BLM-administered lands. The payments shown reflect cost reimbursement from cooperative agreements only. Federal Land Policy and Management Act of 1976 (1977). Payment to Harper's Ferry, WV. Assistance is provided to the Town of Harper's Ferry, WV, for Police Force Use. Table 2 (Cont.) FEDERAL PAYMENT IN LIEU OF TAX AND FORMULA BASED PROGRAMS (1978-80) BA: Budget Authorization-60: Budget Outlay

Reconveyed Coos Bay Wagon Road Grant Lands. Out of receipts from the Coos Bay Wagon Road grant lands in Oregon, payments in lieu of taxes are made to Coos and Doug- lass Counties for schools, roads, highways, bridges, and park districts out of the first 75% of receipts. Local tax rates are applied to the value of lands which are appraised every ten years by one county representative, one DO1 representative, and one nonaligned third party. Trinity River Basin Project Payments are made to Trinity County, CA, for additional costs of road improvements during construction of Trinity River division attributable to such construction; and for an annual PILOT from the project's operating revenues equal to the tax on the value of the real property and improvements taken for project purposes at the time it was removed from the tax rolls. 69 Stat. 720 (1955). Payments In Lieu of Taxes (PILOT) Act of 1976. Payments are made to local governments which contain entitlement lands (national forests, national parks, wilderness areas, COE and BOR reservoirs). Payments have an unrestricted use (Note: Due to early and are based on a 754 per acre payment (maximum) but will administrative and en- vary by population of eligible local government (to a population titlement definitional ceiling) and the amount of revenues derived from these entitle- problems, BO was es- ment lands. timated at $125- $135,000,000 for FY In addition to this flat payment schedule, section 3 of the act 79-80.) provides that, for the lands acquired since 1971, 1 Oh of fair market value at time of acquisition shall be paid to the local government where such lands are located. However, this payment amount is not to exceed the amount of taxes which were paid on the land before acquisition and is to be made to the jurisdiction for only five years. 31 USC 1601, P.L. 94-565. USDA Redwood National Park Expansion Act. & This act essentially extends the PlLOT Act of 1976 to cover cer- DO1 tain additional redwood lands specified in the act. In fact, this payment is appropriated through the DO1 PILOT and reflected in the amount shown above. Section 3 of the PlLOT Act is refer- enced here as well (and is another cause of the delays in the PILOT payments). In the Redwood Expansion Act, however, an ambiguous clause follows this provision which states that any amount in excess of the prior tax payments should be paid in later years. This implies that section 3 payments may clearly extend beyond a five-year period, but that the annual payment amount may not exceed that amount paid under local taxation. The latter amount has yet to be established because of the time delays and land speculation involved throughout the legislative taking process.

1' Information not available concerning class~ficationas BA or 60. NOTE: Abbreviations used are: U.S. Department of Agriculture, Forest Service (USDA. FS); Department of the Interior, Bureau of Land Management (001. BLM); Department of Defense (000); U.S. Army Corps of Engineers (COE); Department of Energy, Federal Energy Regulatory Commission (DOE. FERC); Bureau of Reclamation (BOR); Tennessee Vallev Authoritv ITVAI: Deoartment of Commerce, Nat~onatOceanlc and Atmospharlc Admlnlstratlon (DOC. NOAA) Farmers Home Admmstrat~on(FmHA). Nat~onalPark Servlce (NPS) Health. Educatlon, and WelfareIDepartment of Educatlon. Offlce of Educat~onIHEWiDED. OED) Hous~noand Urban Development (HUD); Department of Transportation (DOT): and Veterans Administration (VA). SOURCE: AClR staff compilation Table 2 (Cont.) FEDERAL PAYMENT IN LIEU OF TAX AND FORMULA BASED PROGRAMS (1 978-80) BA: Budget Author~zation-BO: Budget Outlay

Title II of the act provides for unemployment compensation * 79' $ 33,000,000 benefits to persons affected by the removal of certain industries from the acquired land, ensures these persons layoff and vaca- tion replacement benefits, makes payments to applicable pen- sion, welfare and insurance funds, and provides employees' severance pay and certain moving expenses. Economic impact studies and mitigation programs are also ensured for the affected jurisdictions (two counties). P.L. 95-250. 92 ~(1978).

DO1 Refuge Revenue Sharing Act Amendment. This act extends coverage of the PlLOT Act of 1976 to national fish hatcheries and similar refuge areas not previously covered and provides for revenue sharing payment to each county in which fee areas are situated (as discussed earlier). The amendments also extend PILOT coverage to those lands on which are located semiactive or inactive installations, not including industrial installations, retained by the Army for mobilization purposes and for support of reserve component training. However, it excludes PILOT coverage on those lands acquired from state and local governments which were not previously taxable (unless they were donated). These payments are reflected in the totals for PILOT payments and refuge revenue sharing, listed earlier. HEWIDED Education Grants in Federally Affected Areas. BA 78: 805,000,000 79: 816,000,000 (OED) Payments are made directly to school districts to assist in the 80: 528,000,000 construction and operation of schools where enrollments and the BO 78: 766,349,000 availability of revenues from local sources have been adversely affected by federal activities. 79: 799,584,000 P.L. 81-874 (1950). 80: 619,456,000

HUD PILOT for Public Housing Authorities (PHA). BA 8 60 78: 33,305,634 Payment is for 10% of the shelter rent received by PHA's (less some of the utility payments made by tenants) for low cost housing constructed by the housing authority. Payments reflect an extrapolation of the actual expenses of 80% of the PHAs. All are as of June 30 of each year. 42 USC 1413 (c). HUD Slum Clearance and Community Development. 42 USC 1456 (c)(3). Payments included in total for public housing listed above. HUD Defense Housing, Etc. Erected under the Lanham Act During World War 11. 42 USC 1546. Payments included in total for public housing listed above.

1' Information not available concerning classification as BA or 80. NOTE: Abbreviations used are: U.S. Department of Agriculture. Forest Serv~ce(USDA. FS); Department of the Interlor. Bureau of Land Management (DOI, BLM); Department of Defense (DOD); U.S. Army Corps of Engineers (COE); Department of Energy. Federal Energy Regulatory Commission (DOE, FERC); Bureau of Reclamation (BOR); Tennessee Valley Aulhorlty (TVA); Department of Commerce, National Oceanic and Atmospheric Administration (DOC. NOAA); Farmers Home Administration (FmHA); Natlonal Park Service (NPS); Health, Education, and WelfarelDepartment of Education, Office of Education (HEWIDED. OED); Housing and Urban Development (HUD); Department of Transportation (DOT); and Veterans Administration (VA). SOURCE: ACIR staff com~ilation. Table 2 (Cont.) FEDERAL PAYMENT IN LIEU OF TAX AND FORMULA BASED PROGRAMS

(1978-801 I BA: Budget ~uthorhation-BO: Budget Outlay

HUD Payments on Foreclosures. Single Family, Property taxes are paid to the appropriate tax collecting authority BA BO 79: for HUD's single family and multifamily-acquired inventory; properties which HUD owns because of FHA foreclosures. BA 8 BO 79: DOT St. Lawrence Seaway Act. * 77: The St. Lawrence Seaway Development Corp. is authorized to 78: make payments to state and local governments for property 79: which was subject to local taxation before acquisition by the cor- 80 (est): poration. Payment is at the corporation's discretion and is not to be more than the taxes payable for such property in the condition when acquired. Approximately 2,800 acres are owned, most of which is held in open space. 68 Stat. 93; 33 USC 986 (1954). GSA Payments for Surplus Real Property. Administrator makes PILOT on real property declared surplus by government corporations, pursuant to Surplus Property Act of 1944. 63 Stat. 377; 40 USC 490(a) (1949). DOD Trident Community Impact Assistance Program. * 75-80: 55,500,000 Due to the rapid military growth for the Pacific home port of the (or roughly Trident submarine and the associated developmental impacts 11,000,000 within the Puget Sound region, Kitsap County, WA, receives annually) capital construction grants for certain construction projects. Section 608 of P.L. 93-552 (1974). Payments on Foreclosures. 78 : Property taxes are paid to the appropriate tax collecting authority 79 (est): for properties which VA owns because of VA mortgage foreclosures. These payments come from a revolving fund as there are no appropriations for this as a program. The taxes, which vary yearly, are a lien on the property ahead of the mortgage and therefore are paid to reduce VA holding time and enhance property resale. TVA Mitigation Payments. * 78: TVA makes negotiated payments to certain local governments (usually urban communities) which are heavily impacted by the authority. Payments are earmarked for certain community services for the Hartsville, Yellow Creek, and Phipps Bend nuclear projects until 1985 as well as five other Tennessee development districts and the State of Tennessee.

1' Information not available concernina classification~ - as- . BA- or. BO- - . NOTE: Abbreviations used are: U.S. Department of Agriculture. Forest Service '(USDA, FS); Department of the Interior. Bureau of Land Management (DOI, ELM); Department of Defense (DOD); U S. Army Corps of Engineers (COE); Department of Energy, Federal Energy Regulatory Commission (DOE. FERC); Bureau of Reclamation (BOR); Tennessee Valley Authority (TVA). Department of Commerce. National Oceanic and Atmospheric Admlnistration (DOC. NOAA); Farmers Home Admlnistration (F~HA);National Park Service (NPS); Health, Education, and WelfareiDepartment of Education, Office of Education (HEWIDED, OED); Housing and Urban Development (HUD); Department of Transportation (DOT); and Veterans Admtntstration (VA). SOURCE: AClR staff compilation. Table 2 (Cont.) FEDERAL PAYMENT IN LIEU OF TAX AND FORMULA BASED PROGRAMS (1978-80) BA: Budget Authorization-BO: Budget Outlay

Payment to Norris City, TN. * 79: $ 50,000 While it is a one-of-a-kind payment, this program reflects the fact 80: 50,000 that Norris is essentially a TVA town. The annual payment cov- 81 : 50.000 ers the costs of specified community services "above and beyond what would normally be rendered" by the city government were TVA not part of the community. Internal agreement and contract no. TV 504-79A.

' lnformatlon not available concerning classificatton as BA or 00. NOTE. Abbreviations used are: U.S. Department of Agriculture, Forest Service (USDA. FS); Department of the Interior. Bureau of Land Management (DOI. BLM), Department of Defense (DOD); U.S. Army Corps of Engineers (COE); Department of Energy, Federal Energy Regulatory Commission (DOE, FERC); Bureau of Reclamation (BOR); Tennessee Valley Authority (TVA); Department of Commerce, National Oceanlc and Atmospheric Administration (DOC, NOAA); Farmers Home Adminlstration (FmHA); National Park Service (NPS); Health, Education, and WelfareIDepartment of Education, Office of Education (HEWtDED. OED); Housing and Urban Development (HUD); Department of Transportation (DOT); and Veterans Adminlstration (VA). SOURCE: AClR staff compilation.

then computed by multiplying the number of if not in the applicant agency's county, is total- children in a subcategory by their respective ly or partly located in its state. Eligible "im- entitlement. Following this determination, a pact" lands also include Indian lands, even three-tier payment structure adds another ele- though they are held in trust rather than owned ment of difference between various entitlement by the federal government. However, there are rates by paying only a certain variable percent- no statellocal taxes on Indian lands either. At age of a district's authorized entitlement. In the present, Indian lands are considered separate first payment tier, 100°/o of entitlement is paid nations and are therefore accorded tax exemp- to school districts on the basis of section 2 and tion similar to an embassy or foreign govern- 25% of all districts' funding levels is paid for ment building.32 all subcategories of 3a and 3b children. The The payments under P.L. 81-815 for school second-tier payments are then made, paying construction in federally affected areas account from 36.85% to 60.93% of a district's author- for only 4% of the total payments under the ized funding level for 3a students and from 28 school impact aid program. Initiated after the to 32% for 3b students. The third-tier payment post-World War I1 baby boom, this part of the arrangements can only be entered after tier 2 program has consistently had hundreds of an- payments are completed, but appropriations nual applications. However, it has never been have never been large enough to permit pay- sufficiently funded to meet the demand for ments under the third round. school construction assistance, with major The substantial payments under the impact shortfalls in appropriations occurring since FY aid program go directly to the applicant school 67. For example, with program requests of ap- districts. In FY 1976-77 alone, local districts proximately $80 million, FY 78 appropriations claimed 8,781 owned or leased tax exempt fed- totaled only $30 million. As a result, there has eral properties, including low-rent housing been a backlog of eligible, unfunded applica- projects, as a basis for applications under both tions exceeding $450 million. Moreover, recent the 815 and 874 parts of the program. Payments proposals to reduce the 1980 U.S. budget, if are made to the local educational agency if the implemented, will cut the FY 80 budget appro- parent is employed on federal property which, priation in half. Because of the magnitude of the impact aid tle potential at this time for Congressional ap- payments, which in FY 79 were $816 million proval of this type of grant to help defray fu- (appropriation), three tables have been pre- ture operation and maintenance costs induced pared and appear here, disaggregating annual by this or similar federal development. budget appropriations and outlays by each Other large amounts of grant funds for feder- state (Table 3), for the 45 largest U.S. cities al or federally induced impacts are provided in (Table 4), and for selected cities and counties community assistance programs for special throughout the U.S. (Table 5). capital and operating costs, as in atomic energy Payments with Special Grants and Loans communities, or through formula grants, such as those administered by the Department of Special grant and loan programs represent Commerce. another large amount of the federal to Currently, the Commerce Department, statellocal expenditures. Seven such programs, through its Coastal Zone Management Program which are either growth impact grants or ener- appropriations, has developed a coastal impact gy (growth) impact funds, are included in this program which includes both Community En- group. Other formula payments are distin- ergy Impact Formula Grants and Community guished from those described here primarily Energy Impact Fund (CEIF), the latter includes because they promote essentially universal, as special loans and guarantees, state participa- opposed to targeted, assistance to communities tion grants, planning and environmental throughout the U.S. grants. Begun in 1976, this program was de- Growth impact grants-usually capital signed to provide entitlement money to states grants-have been provided to some local gov- "which have experienced net adverse impacts ernments to help defray the costs of new . . . resulting from exploration and production infrastructure construction (such as highways, of energy facilities."S4 It was initiated follow- schools, sewers, administrative facilities) ing the 1975 U.S. Supreme Court decision in incurred by the locality as a result of a new United States vs. Maine, which held that the andlor expanded federal activity. The Trident federal government had sole jurisdiction over Community Impact Assistance Program, estab- resource development beyond the three-mile lished under section 608 of P.L. 92-552, is one offshore limit. Thus, it was determined that the such grant.33Under this program, between states would have no part in any decision con- 1975 and 1981, $55.5 million of construction cerning development on the Outer Continental and construction-related grants will have been Shelf (OCS) nor would the states benefit from channeled to the State of Washington (38.5%) any lease bonuses or royalties from resource re- and to the three Washington Counties of Kitsap covery in their offshore areas. The absence of a (58.1%), Jefferson (2.5%), and Mason (0.9%). receipts-sharing provision similar to the Min- These grants will fully cover the added state eral Lands Leasing Act-coupled with a recog- and county infrastructure costs arising from nition that the problem of onshore impacts the construction of the Navy's West Coast Tri- from offshore development was a large finan- dent Submarine Base in the Hood Canal off cial burden for states to shoulder-led to the Puget Sound (but not operating costs). In addi- development of a formula for the distribution tion to these funds, the Kitsap County area en- of program funds based on a measurement of joyed a special $6 million allocation for school need using the amount of new energy develop- aid during the 1976-78 fiscal years, through ment, and new employment in the coastal P.L. 94-94. * After 1981, however, the state and zone. A precise formula has not yet been devel- counties will not receive any special added oped; however, the actual funding formula has, funds to defray the ongoing operating costs of instead, been based on each year's OCS lease servicing the expanded submarine base and its sales and the amount of employment accruing personnel or of maintaining Trident-induced to each state and community. The on and infrastructure facilities. There appears to be lit- offshore impacts of OCS development should continue to rise, as will the federal govern- * This special payment is not included in Table 2 be- ment's oil and mineral receipts from private cause it has expired. leases. Table 3 EDUCATION IMPACT AID PAYMENTS TO U.S. STATES AND TERRITORIES UNDER P.L. 81 -815 AND P.L. 81 -874, FY 1978-80

State or Appropriations 1980 Territory 1978' 197g2 Estimate

Total

Alabama Alaska Arizona Arkansas California

Colorado Connecticut Delaware District of Columbia Florida

~awaii Idaho Illinois Indiana

Iowa Kansas Kentucky Louisiana Maine

Maryland Massachusetts Michigan Minnesota Mississippi

Includes outlays from P.L. 81 -815, totaling $26,797,348. 21ncludes outlays from P.L. 81-815, totaling $29,484,756. Approximately $27,000,000 of total is undistributed. 3Does not include appropriations or outlays from P.L. 81-815. Approximately $12,000,000 of this total is undistributed. Includes some Trident funds.

SOURCE: US. Department of Education and AClR staff computations. Table 3 (Cont.) EDUCATION IMPACT AID PAYMENTS TO U.S. STATES AND TERRITORIES UN- DER P.L. 81 -815 AND P.L. 81 -874, FY 1978-80

State or Appropriations 1980 Territory 1978' 1979 Estimate

Total

Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah

Vermont Virginia Washington4 West Virginia Wisconsin Wyoming Guam Puerto Rico Virgin Islands Table 4 EDUCATION IMPACT AID PAYMENTS TO THE 45 MOST POPULATED U.S. CITIES, 1978 AND 1979 Payments City 1978' 1979

- - 1. New York, NY $20,700,091 $1 7,733,855 2. Chicago, IL 3,209,438 3. Los Angeles, CA1 2,736,458 4. Philadelphia, PA 3,100,843 5. Detroit, MI 369,388 6. Houston, TX 382,250 7. Baltimore, MD 1,386,891 8. Dallas, TX 193,661 9. Indianapolis, IN 359,815 10. San Diego, CA 14,454,924 11. San Antonio, TX2 1,297,330 12. Washington, DC 5,464,427 13. Honolulu County, HI 15,722,364 14. Milwaukee, WI 352,730 15. Phoenix, AZ 101,740 16. San Francisco, CA 1,874,024 17. Memphis, TN 989,488 18. Cleveland, OH 792,133 19. Boston, MA 1,478,125 20. Jacksonville, FL 3,074,485 21. New Orleans, LA 1,379,056 22. San Jose, CA Nonapplicant 23. Columbus, OH 763,685 24. St. Louis, MO '1 47,480 25. Seattle, WA '261,830 26. Denver, CO '2,027,546 27. Kansas Cityn YO '1 76,471 28. Pittsburgh, PA 601,756 29. Nashville-Davidson, *239,l39 30. Atlanta, GA 1,156,512 31. Cincinnati, OH 475,927 32. Buffalo, NY 270,648 33. El Paso, TX 3,589,255 34. Minneapolis, MN '155,148 35. Omaha, NE '477,259 36. Toledo, OH 255,070 37. Oklahoma City, OK 454,233 38. Miami, FL 1,990,764 39. Fort Worth, TX *1,411,354 40. Portland, OR 132,391 41. Newark, NJ 657,952 42. Louisville, KY 732,001 43. Long Beach, CA 1,177,897 44. Tulsa, OK 383,694 45. Oakland, CA 1,339,579

1 Unified Zlndependent school district 'Indicates only partial payment of entitlement as of January 7, 1980.

SOURCE: U.S. Department of Education. CHART 2 ESTIMATED FEDERAL PAYMENTS FOR RECEIPT SHARING, "PILOT" AND FORMULA-BASED PROGRAMS, PERCENT OF TOTAL PAYMENTS, 1979

Tennessee Valley Oregon and California RR = 4.8% \ / Authority = 4.8% Firearms Excise = 4.2% Other' = 1.9% RECEIPT SHARING Fishing Tackle PROGRAMS = 39.6% Excise = 1.4% Redwood Park Expansion = 1.6% Public Housing = 1.7%

Other' = 5.4%

Community Energy

Impact Program = 5.7% "PILOT" AND FORMULA BASED PROGRAMS = 60.4% 1976 Pilot Act = 6.1%

ESTIMATED TOTAL PAYMENTS = $2.04 BILL1

'PAYMENTS OF LESS THAN 1% EACH ARE INCLUDED IN "OTHER." SOURCE: AClR staff. I Table 5 EDUCATION IMPACT AID PAYMENTS TO SELECTED CITIES AND COUNTIES 1978 AND 1979 Payments 1978 1979

Alabama Madison County Huntsville City Arizona Maricopa County Phoenix City Pima County Tucson City California Los Angeles County Los Angeles City Long Beach City San Francisco County Colorado Denver County Boulder County Loveland City Connecticut Groton City New London County Delaware New Castle County District of Columbia Florida Jacksonville City1 Duval County Brevard County Melbourne City Melbourne Beach City Cape Canaveral City Georgia Atlanta City Fulton County Columbus (Muscogee Co.) Chatham CountylSavannah Camden County St. Mary's City Glynn Countyl Brunswick City Liberty Countyl Hinesville City Long County Bryan County Table 5 (Cont.) EDUCATION IMPACT AID PAYMENTS TO SELECTED CITIES AND COUNTIES 1978 AND 1979 Payments 1978 1979

Hawaii Honolulu County Illinois Cook County Chicago City Peoria County1 Peoria City Iowa Black Hawk County Waterloo City Cedar Falls City Maryland Baltimore County Baltimore City Montgomery County Massachusetts Boston City Essex County Middlesex County Suffolk County Michigan Detroit City Wayne County Missouri St. Louis County St. Louis City Nebraska Douglas County Omaha City New Jersey Essex County Newark City Somerset County New York New York City Bronx County Kings County New York County Queens County Richmond County Table 5 (Cont.) EDUCATION IMPACT AID PAYMENTS TO SELECTED CITIES AND COUNTIES 1978 AND 1979 Payments 1978 1979

North Carolina Durham County Wake County Raleigh City Durham City Tarboro City1 Edgecombe County Ohio Cuyahoga County Cleveland City Franklin County Columbus City Urbana City Champaign County (Graham) Oregon Multnomah County Portland City Reedsport City Douglas County Pennsylvania Philadelphia City and County South Carolina Charleston Countyl Charleston City Richland Countyl Columbia City Tennessee Montgomery Countyl Clarksville City Hopkinsville City Davidson Countyl Nashville City Davidson County Texas Dallas County Dallas City Fort Worth City Tarrant County Harris County Houston City Nueces County Corpus Christi Table 5 (Cont.) EDUCATION IMPACT AID PAYMENTS TO SELECTED CITIES AND COUNTIES 1978 AND 1979 Payments State/City/County 1978 1979

- -- Vermont Burlington City1 Chittenden County Virginia Fairfax County Portsmouth City Norfolk City Virginia Beach City Richmond City Washington Bremerton City Kitsap County Olympia City Thurston County

1 Not an identifiable applicant. Nonapplicant. One applicant. Indicates only partial payment of entitlement as of January 7, 1980. Slncluded in New York City; not identifiable separately.

SOURCE: US. Department of Education.

SUMMARY OF MAJOR FEDERAL PAYMENT Moreover, if a mix of 1979 budget authoriza- PROGRAMS tions and outlays is used to compute the total, using the budget outlay only when it was Tables 1 and 2 detail each of the revenue and receipt-sharing programs which have been dis- larger than the corresponding authorizations (usually reflecting cost overruns or payments cussed to this point. Chart 2 provides a summary of the programs, both by type and by size carried over from prior years' appropriations), of the major program components. The identi- the following sums are computed: %cation of these programs is merely illustrative Receipt-Sharing Programs $ 807,615,398 of the history and depth to which in lieu of tax PILOT Programs 1,234,444,797 programs have become part of the current sys- Total Payment Programs $2,042,060,195 tem of intergovernmental transfer payments. Using 1979 budget data, total budget authori- Where a 1979 appropriations figure is not zation for these programs is: shown on a program listing, the 1979 budget outlay or corresponding figure from the year Receipt-Sharing Programs $ 784,643,398 closest to 1979 was used for both computa- PILOT and Formula Programs tion~.~~ 1,209,412,797 Every attempt was made to determine the Total Payment Programs $ 1,994,056,195 correct budget and funding levels, an effort that often required a lengthy search with an to local governments for federal holdings OMB budget officer or program analyst. How- throughout the U.S. by virtue of Congressional ever, because they were not listed as budget consent to state and local taxation of the prop- line items, some of the payment programs re- erty of these institutions. The taxable proper- quired a more detailed financial analysis. ties owned by several Congressionally created These "hidden" funds-usually a receipt- corporations include the real and personal sharing fund or one of the small PILOT-type property of the federal credit unions and programs-were typically found in a larger Amtrak, and the real property of the Federal revenue account or as part of a broadly autho- Deposit Insurance Corporation (FDIC), the Fed- rized program area. (Some, as can be seen, eral Home Loan Banks (FHLB), the Federal Sav- were never found.) Nevertheless, in all cases, 'ings and Loan Insurance Corporation (FSLIC), the payment figures were obtained from relia- the Federal Land Banks, and the Federal Re- ble sources working within that program area. serve Banks. * Receipt-sharing or PILOT programs that have Each of these institutions was surveyed to been repealed or have expired are not included obtain the amounts of property taxes it regular- in Tables 1 or 2. One example of such a pro- ly paid throughout the U.S. Typically, the indi- gram is the payment program for proper- vidual banks of these financial institutions ties-primarily old military industrial report to their central authorities in Washing- plants-owned by the Reconstruction Finance ton, DC, which usually collected this survey Corporation (169 Stat. 721; 40 USC 521-4),, information. However, no information was ob- which was repealed in 1970 by P.L. 91-466 (84 tained on federal credit unions and federal Stat. 990).* This program had provided for land banks, which are spread throughout nu- GSA and other "holding" agencies to pay the merous communities in the nation, because no respective property taxes on these properties to central authority collects data on the aggregate affected state and local taxing jurisdictions, tax paid by these groups. The total real proper- using the local assessment at the time of the ac- ty tax paid in 1979 was estimated at about $20 quisition of the property to establish the base million. A description of each of the other pay- figure upon which to apply the local tax rate. ments follows. Another example of an expired program is the FDIC: The Federal Deposit Insurance specific legislation passed in the 1960s to alle- Corporation owns only one of viate the impact of the "SAFEGUARD" project its buildings, the headquarters in North Dakota. Although plans for this new building in Washington, DC, installation were subsequently dropped, spe- upon which it paid the District cial legislation had permitted the Department of Columbia approximately of Defense to pass funds through to local gov- $180,000 in real property taxes ernments to develop the local infrastructure. It for fiscal 1979. All other region- should be noted, however, that this program al and field offices and training and the special legislation for Kitsap County centers of the FDIC are operated are the only cases of specific legislation as- out of privately leased facilities. signing federal funds to address the impact of new defense installations. AMTRAK: Amtrak owns property in many states and has no federally man- Other Federal Payment Programs dated tax exemption. In 1979, Amtrak paid $5,095,446 in real FEDERAL CORPORATIONS AND FEDERAL property taxes. FINANCIAL INSTITUTIONS FHLB: There are 12 Federai Home Loan Federally owned corporations and federal fi- Banks in the United States, nancial institutions make direct tax payments operating under the authority of

* 1971 military appropriations actually extended these payments to a few communities for two years beyond Various other tax bases (e.g., sales or income) may also this repeal. be taxed, depending on the specific institution. the Washington, DC, Federal true for most of the rest of the Home Loan Bank Board bank board's system, FSLIC (FHLBB). Although the bank leases space in privately owned board is considered an execu- buildings for its field office active agency and thus is not tivities. Lease information was taxed on its property in the Na- not obtained for these holdings. tion's Capital, its 12 member banks have no property tax im- Federal The Federal Reserve System munity. As a practical matter, Reserve (FED) includes the Board of however, the lack of immunity Bank Governors, located in the Dis- status makes little difference as System: trict of Columbia, and 12 federal 11 of the 12 banks operate out of reserve banks with 25 branches leased buildings, upon which a operating in 52 cities across the regular property tax is levied. United States. As was true for The San Francisco FHLB is the the bank board (FHLBB), the only one of the 12 which owns building that houses the Board its office quarters. Four of the of Governors-the FED'S leased buildings shift their tax supervising authority in Wash- directly to the banks, however. ington, DC-enjoys immunity Thus, the total tax from these from local (e.g., District of Co- five cities is estimated to have lumbia) taxation. The buildings been $252,200 in 1979. Of that in 39 other cities in the country total, the San Francisco Bank's are taxable, however, and in real property tax bill in 1978 1978 the FED paid $13,900,000 was estimated at $73,700. Table in state and local real property 6, prepared by ACIR staff, docu- taxes. In the 12 other U.S. cities ments these actual and esti- in which the FED is located, the mated tax payments. system's operations are carried FSLIC: The property of the Federal Sav- out under leasehold arrange- ings and Loan Insurance Corpo- ments. ration, which is supervised by the Federal Home Loan Bank At least one other federal agency has con- Board, would also be subject to sented to state and local taxation of the proper- direct real property taxation by ty it owns and uses. In 1980, after months of state and local authorities if it negotiations, the Tennessee Valley Authority owned its own offices. But, as is (TVA) agreed to reimburse the State of Wyo-

Table 6 FEDERAL HOME LOAN BANK PROPERTY TAX PAYMENTS FOR REAL ESTATE TAXES (in dollars) City 1977 1978 1979

Boston $ 30,800 $ 35,100 $ 39,200 New York 55,800 55,800 55,800 Pittsburgh 49,000 49,000 32,800 Atlanta 42,900a 44,400 50,700 San Francisco 1 70,000 73,673 73,673

a Estimated from 1978-79. Reduced because of Proposition 13. ming for its uranium mining activities there, from the opportunity to shift certain expendi- according to state law rather than through the ture functions (e.g., highways, education at all traditional TVA PILOT programs. In a signifi- levels, welfare) to a state. cant departure from agency policy, TVA and It is within this general framework that the all of its contractors in Wyoming now face the federal payment is determined annually.J8 Al- same procedures and requirements applicable though there is no disputing the fact that the to private companies in the state, including federal presence creates significant financial, state regulations. In addition to clarifying the social, and environmental costs for District res- often abused policy of derivative federal im- idents and that the Congress should somehow munity, this departure from principles gov- be held accountable, there is no consensus re- erning the existing TVA payment programs garding the "correct" way to conceptually listed in Table 1 and 2 also serves to illustrate measure, and therefore determine the level of, the highly discretionary nature with which the federal payment. Currently, at least four ar- agency payment decisions can frequently be guments are considered as part of the debate made. Because the agency will be subject to the between Washington city officials and the Con- same excises as a private company undertaking gress regarding the proper rationale: (1) the ad- the same operations, Wyoming has agreed to ditional expenditures, including direct man- return all compensatory payments "made by dates, placed on the city as a result of the TVA pursuant to the TVA Act in connection special nature of the federal presence and its with TVA's uranium projects in Wyoming and related activities; (2) taxes forgone due to the will agree not to claim later that these pay- tax immunity of the federal government; (3) ments are due."36 The precedent is clearly set revenues lost as a result of the Congressional for other agencies and federal property hold- prohibition on municipal taxation of locally ings to be treated similarly. generated nonresident incomes, and (4) the fiscal result of the Constitutional restrictions on FEDERAL PAYMENT TO THE the District which define its legal and geo- DISTRICT OF COLUMBIA graphical status-a status that causes the city Each year the Congress makes an annual to be denied state takeover of "local" services lump-sum payment to the District of Columbia. commonly available to other municipal govern- This payment, a unique form of intergovern- ments. mental grant-in-aid in the federal-statellocal re- Although each of these arguments has some lationship, was initiated in 1790 when the merit, the most plausible reason for making an District-Washington, DC-was designated as annual federal payment to the District rests on the nation's Capital City. The unique nature of the fourth-that the federal government should this payment, and the controversy surrounding act as if it were the city's state. Only when seen it, stems from the special characteristics of the in this "state surrogate" framework is the an- jurisdictional status of the District of Columbia nual federal payment (authorized at $300 mil- itself. Limited in its geographic size by the U.S. lion in FY 1980) uniquely justified. The prob- Con~titution,~'the District is the only U.S. city lem with the first three arguments is that the which is not part of a state but, rather, is bor- fiscal problems which result are simply not dered on all sides by other states (Virginia and unique to the Nation's Capital. * They apply to Maryland). Although most legal experts agree a Cleveland, an Albuquerque, or a Portsmouth, that most of what is now known as "Washing- as well as to Washington. Indeed, in the case of ton, DC," could become part of one or both of real property taken off the local tax rolls as a these two states, such an event is most improb- result of actions by a higher level of govern- able. The fiscal result is that the District must behave as if it were both a city and a state. Ac- cordingly, it has state as well as local expendi- * Moreover, extraordinary federally related expenses to ture responsibilities. And, although it utilizes the city can be, and often are, paid separately. Thus, in most of the revenue tools associated with both 1977 $650,000 was added to the federal payment to help defray costs of the Presidential inauguration. In state and local governments, the city is still at a 1979, there was a $2.6 million payment because of the net fiscal disadvantage as it is unable to benefit farmer demonstrations on the Mall. ment, Washington, DC, is not even the most se- portunity for unnecessary federal-statellocal verely impacted of U.S. 10calities.~~ entanglement exists. Because the payment lev- An even more complex problem concerns the el must be negotiated annually, top-level Dis- process by which the annual federal payment trict officials may have to divert their attention is made. Indeed, this process serves as an ex- to policy matters which become "issues"-of- ample par excellence of the intergovernmental ten at the whim of a particular member or entanglements that can occur under an ad hoc group of members of Congress. For example, payment approach. The stage for these entan- during recent Congressional hearings on the glements is set by the fact that each year the federal payment for the District, one Congress- determination of the level of the payment in- man took the opportunity to use the city's volves at least six governmental groups: the Of- budget process to formally register a complaint fice of the Mayor of District of Columbia, the about the conditions for dogs at the city's ani- city council, the U.S. Office of Management mal shelter. The "dog issue" may be a legiti- and Budget, the appropriations subcommittees mate one, but it hardly deserves to be part of of both the U.S. Senate and House of Repre- the federal payment debate. The point is that sentatives, and the Office of the President. The the negotiated nature of the payment opens up primary result is that pros and cons of the con- the entire fiscal process to the possibility of ceptual arguments for a payment are essential- such abuse. ly ignored, and the payment level is politically In short, viewed from city hall, the federal- negotiated, with Congress having most of the to-District payment process simply does not negotiating strength. This, in turn, creates two "work." However, from the Congressional van- types of problems: fiscal uncertainty for the re- tage point, perhaps, the ad hoc approach is just cipient and unnecessary interference into local as it should be: it leaves little doubt that with matters by the grantor. federal money, the federal government still can The uncertainty results from the fact that ultimately dictate the intergovernmental rela- there is no advanced funding mechanism for tionship. the payment. Although the District's home rule OTHER PAYMENTS act40 authorizes $300 million annually, the appropriation has always fallen below that figure. The federal government also employs a broad For example, in FY 79 the payment was $250 array of "inkind" payments for community million, or only 83% of the authorization. In economic adjustment and, in one case, mone- FY 80 that figure rose to $267 million or 89% tary grants to help defray the cost of local of the authorization. infrastructure development. Specifically, the These gaps, though large, do not in them- Office of the Assistant Secretary for Manpower, selves create the fiscal uncertainty. That prob- Reserve Affairs and Logistics within the De- lem stems from the fact that Congress usually partment of Defense contains an Office of Eco- does not agree on the appropriation figure until nomic Adjustment (OEA), the objective of the end of the fiscal year for which the pay- which is to assist communities-through a ment was budgeted to be expended by the city. concerted utilization of existing federal, state, (In 1979 the federal government gave the city local, and private sector resources-to over- its payment only four days before the next come adverse economic impacts resulting from budget year began.) The practical effect is program changes of the Department of Defense obvious-the city's budget planning better re- (e.g., base closings, contract changes, person- flects an episode of the Perils of Pauline than a nel reductions, and growth impacts).41 The of- well laid out document for public service de- fice is small, with a staff of only 20 people and livery. In order to eliminate this fiscal uncer- a budget of $700,000,which is used for in- tainty, the negotiation process itself should be house studies and contracting with private eliminated, or, at a minimum, the payment lev- consultants. OEA assistance is limited to el should be appropriated in advance of the fis- communities and substate regions that are ex- cal year in which it is to be spent. pected to suffer, or have suffered, significant Second, as long as the payment process re- adverse economic impacts from DOD activities, mains on an ad hoc, negotiated basis, the op- and ranges from advice and technical analysis to coordinating local applications for various special DOD assistance, $26 million from do- federal programs involving grants and loans. mestic agencies, and $22 million in defense ac- At least 265 community projects have received cess highway funds. The recipient govern- major assistance from the office since its incep- ments will not continue to receive this same tion in 1961. * level of funding in most programs. They will, Communities that are experiencing adverse however, be eligible for increased funds from economic impacts because of rapid buildups, the education impact program for school dis- or existing high levels of defense activity, such tricts and some other existing federal grants as Kitsap County, WA, the Fort Stewart area of which are based on a per capita formula. Georgia, and Camden County, GA, are among In the case of the Georgia communities, in those currently receiving OEA assistance. Like FY 80, approximately $12 million was ear- Kitsap County, the southeastern Georgia areas marked for federal assistance to the areas are experiencing rapid growth with expansion which have been severely impacted by military of military base activity (the U.S. Army's Fort activities. * However, these funds are the feder- Stewart expansion around Bryan, Liberty, and al share of state and local assistance to these Long Counties, and the Navy's Atlantic Polaris- impact areas and their receipt is contingent not Poseidon submarine port in Camden County). only upon the submission and approval of In all three cases, technical assistance has been formal applications, but also on the availability available and, more important, planning and of local matching contributions-a difficult economic development money (usually project matter considering the current inadequacy of grants) has been obtained for local government the tax base to support the required revenues. use. 'The bulk of the total, $11.4 million, is provided The Department of Defense has also mobi- for the Fort Stewart, GA, area and is divided lized the resources of other federal, state, and between the Cities of Ludowici, Hinesville, and local agencies and the private sector through Glenville, and Liberty, Long, and Bryan Coun- an economic adjustment program operated by ties. The remaining $1 million is for Camden the Economic Adjustment Committee under the County, which also includes the Cities of chairmanship of the Secretary of Defense. Kingsland and St. Mary's. The total assistance Strengthened in 1978 through Executive Order package is only one part of the large amount of 12049, the Economic Adjustment Committee public facility costs these jurisdictions are includes members of the major cabinet-level presently absorbing and must continue to try to departments, thereby serving as a forum in absorb due to their "boom-town" situation^.^^ which the impacted community-through The Economic Adjustment Committee and OEA, which actually serves as its staff-can OEA's inkind assistance and packaging of oth- obtain coordinated federal program assistance. er federal assistance for a federally impacted Since the committee only deals with a handful jurisdiction establishes responsibility within of jurisdictions each year, its main value is its DOD to correct its own impacts. However, this ability to provide federal sensitivity to the lo- method of federal assistance can only partially cal consequences of its actions, to channel respond to problems as they arise. Such prob- funds to a targeted area, and to cut some of the lems are rarely anticipated in budget forecasts, red tape and other delays that typically accom- multiyear capital improvements programming, pany federal program assistance or joint fund- or long and short-range planning. The program ing arrangements. is by definition "special" and provides only for The committee was highly successful in "adjustment assistance." It does not, and can- securing funds for the Kitsap County area, and not, deal with comprehensive federal, state, or over a five-year period managed to obtain a to- local solutions to intergovernmental tax immu- tal of $104 million, including $55 million in nity.

* This number reflects communities receiving several types of assistance, not just communities experiencing * A total of $45 million in loans and grants has been rapid military buildups. "identified" for federal assistance needs. REVIEW OF EARLIER STUDIES ed by provisions for cutoff dates (property acquired prior to 1946 was to be excluded) and As the foregoing discussion indicates, over by exemptions for federal properties used pri- the years Congress has recognized a responsi- marily for services to the local (as distinct from bility to some state and local governments for national) public. Although a detailed draft bill making a variety of in lieu of tax payments to accompanied the Budget Bureau's recommen- "compensate" for the federal presence. Howev- dations, no legislative action was taken. er, the result has been the buildup of a patch- Three other major reports dealing directly work of uncoordinated and ad hoc payment with the question of federal property tax com- programs. Accordingly, one of the major ques- pensation to local governments for tax exempt tions this study will address is whether, given federal lands have been issued in the last ten this environment, the federal government years. All focused largely on "open space" should enact a uniform system of payments in lands. lieu of taxes in order to rationalize its pay- In a 1970 report, the Public Land Law Re- ments system. view commission (PLLRC)-a 19-member Con- The call for rationalization of the current sys- gressional and executive commission-studied tem of payments in lieu of taxes is not new; in- a wide range of issues (outdoor recreation, de- deed, it has spanned the history of this coun- velopment of mineral resources, protection of try. In 1969, the Congressional Joint Economic watersheds, hunting and fishing regulations), Committee (JEC), arguing "only basic equity," including tax immunity of federal lands ad- urged that Congress make payments in lieu of ministered by the Bureau of Land Management, real property taxes on property owned by both the Forest Service, the U.S. Fish and Wildlife the U.S. government and foreign governments Service, the National Park Service, and the De- (embassies, consulates, missions) in the U.S.43 partment of Defen~e.~~The major PLLRC rec- However, as early as 1896 a public uproar was ommendations regarding the tax immunity is- raised regarding the fiscal consequences of sue were: President Cleveland's decision to create 13 new If the national interest dictates that lands U.S. forest reserves out of primarily western should be retained in federal ownership, lands-a reversal of the 19th Century policy the burden of that policy should be borne trend to transfer federal property to private by all the people of the United States and owners and to the states. One federal response not only by those states and governments to this outcry was the National Forest Reve- in which the lands are located. Accord- nues Act (1908), providing for the federal ingly, "fairness and equity demand" that sharing of revenues generated by the new Na- the federal government should make pay- tional Forest System. In 1938, focusing on the ments in lieu of taxes to compensate state concern of the impact of all federally owned and local governments for the tax immu- real estate on state and local taxation, President nity of federal lands. A PILOT system Roosevelt designated a committee of the Na- was specified as a better standard for tional Emergency Council to make a study of determining payments than a system of the extent of U.S. real estate holdings. sharing revenues. The first major effort by an agency of the fed- These payments in lieu of taxes should be eral government to establish some sort of uni- made to the state governments for distri- form system of payments to state and local bution to localities according to state- governments on federal real property was con- established criteria. However, rather than ducted between April 1949, and August 1951, provide full tax equivalency with ad by the Bureau of the Budget (BOB).44At that valorem revenues that would be received time the Budget Bureau, foreshadowing the ba- if the property were in private owner- sic recommendations of the 1955 "Kestnbaum ship, a discount of from 10% to 40% Commission," recommended federal to local in should be provided to recognize "intan- lieu of tax payments on a property tax equiva- gible benefits that some public lands pro- lency bask45 However, the base for measuring vide." This general and wide-ranging the PILOT, as recommended by BOB, was erod- discount policy was intended to give "recognition to the intangible benefits "now-that, in general, the burden and ex- that some lands provide." No hint was penditure characteristics did not vary sys- given, however, of the criteria for tematically with the extensiveness of public determining what point of the range land. Accordingly, the Commission recom- might be appropriate for a given-parcel. mended that Congress maintain its receipts- Moreover, the commission also con- sharing programs pertaining to "federal open cluded that even this range would not be lands," but that provision be made for addi- appropriate for situations of extraordi- tional compensation to counties which met nary benefits and burdens, the quantita- various "hardship" criteria.4' tive extent of which might be determined The third recent study of this issue was con- by statellocal and federal negotiation. ducted by the U.S. General Accounting Office State and local governments were en- in 1979.48 Again, the focus was on the land couraged to tax private possessory inter- payment programs in the western states and, ests on federal land. like the PLLRC, it found inequities and other The "threshold concept," under which administrative problems stemming from the payments in lieu of taxes would be made role of the states in determining the size of the only to the extent that federal lands rep- federal to local payments, as well as computa- resent more than some percentage of total tional problems. Accordingly, the GAO re- land in a particular state or locality, was viewed several alternatives to the current pay- rejected. Two reasons were cited for fail- ment system, including the five basic methods ure to endorse this threshold approach: or rationales for making the payment: cost of First, it is "virtually impossible to arrive federally imposed expenditures; comparable at a logical basis for establishing either a tax burden; net burden of the federal presence; percentage of land or land values," and, fixed formula; and property tax equivalency. Of second, the uneven distribution of feder- these choices, the GAO endorsed the tax- al land among the states makes the equivalency approach as "the most logical ra- threshold "impractical." tionale for making payment,"49 and recommended that this method be phased in over A second major report is the 1978 ACIR several years at the same time the receipt- study on the adequacy of federal compensation sharing programs were being eliminated. to local government for certain tax exempt This ACIR report builds on each of these lands. The major focus of the ACIR study was studies, but arrives at its own set of findings on the question of whether or not the exten- and recommendations independently. The siveness of a denied tax due to federal land scope of the report is larger than that of any of within a county explains (a) local tax burdens the earlier reports and has come at a time when or (b) local expenditures. The study found that the federal presence is more pervasive than at the answer to both of these questions was any other time in our nation's past.

FOOTNOTES McCulloch vs. Maryland, at 439. 8Callector vs. Day, 11 Wall 113 (1871). See discussion in Jerome R. Hellerstein and Walter For an overview of this issue through 1966. see U.S. Hellerstein, State and Local Taxation: Cases and Ma- Advisory Commission on Intergovernmental Relations, terials, 4th ed., St. Paul, MN, West Publishing Co., State and Local Taxation of Privately Owned Property 1978, pp. 921-24. Located on Federal Areas, Summary of Commission 2McCulloch vs. Maryland, 4 Wheat 316 (1819). Report A-6, August 1965, and Property Taxes on Fed- 3McCuJloch vs. Maryland, at 433. eral Enclaves, Hearings Before the Subcommittee on For a discussion, see the legal analysis provided by Ju- Intergovernmental Relations of the Committee on Gov- dith Jacobsen in supplemental documentation to ac- ernment Operations, U.S. Senate, 89th Congress, 2nd company the Interim Report of the Commission on the Sess., July 1966, pp. 1-4. Review of the Federal Impact Aid Program, submitted 'OAmerican Oil Co. vs. Neill, 380 U.S. 451 (1965); a de- to the President and to the Congress, May 6, 1980, es- tailed discussion of this issue is presented in Daniel H. pecially Appendix A. Friedman, "The State Tax Liability of Federal Contrac- 5 McCulloch vs. Maryland, at 434-35. tors," Revenue Administration, 1977, pp. 65-77. Jacobsen, Interim Report of the Commission on the Re- l1 Friedman, "The State Tax Liability," op. cit; p. 69. view of the Federal Impact Aid Program, Appendix A, Also, "(i)n the exercise of (its) power to protect the p. 51. lawful activities of its agencies, Congress has dominant authority which necessarily inheres in its action PILOTS on all real and personal property for county, within the national field." Pittman vs. Home Owners district, state, etc., taxes (subject to some exemptions). Corporation, 208 U.S. 31 (1939). 33 For a background and case study of the Trident pro- 120klohoma Tax Commission vs. Texas Co., 366 U.S. gram, see Robert A. Levin, Fiscal Burdens on Kitsap 342, 356-66, (1949). County, a report prepared for the Trident Coordinating l3 Congressional consent to taxation which destroys the Committee, Port Orchard, WA, September 1979. federal system would be unconstitutional. See, for ex- 34 U.S. Senate, Interior and Insular Affairs Committee, ample, Schechter Poultry Corp. vs. United States, 294 Legislative History of the Coastal Zone Management U.S. 495 (1935). Act, Washington, DC, U.S. Government Printing Of- j4 Federal Land Bank of St. Paul vs. Bismark Lumber Co., fice, 1977, pp. 579-80. eta], 314 U.S. 95, p. 4 (1941). 35 These groupings were used only to make the data as 15 Data provided by the Office of Federal Procurement complete as possible because a better figure was not Policy. available. 16James vs. Dravo Contracting Co., 302 U.S. 134, 1937. 36Ernie Beazley, "TVA to Pay Wyoming for Uranium l7 Friedman, "The State Tax Liability," op. cit., p. 67. Mineland," Journal, Knoxville, TN, June 24, 1980. l8 As the Energy Research and Development Administra- 37 U.S. Constitution, Article I, Sec. 8. tion-now absorbed into the Department of Ener- 38 TO date the most thorough treatment of this District of gy-used to do routinely. Ibid., p. 63, 7311. Columbia payment has been presented in Michael E. 19ACIR, State Taxation of Military Income and Store Bell, "The Federal Payment to the District of Colum- Sales, A-50, Washington, DC, U.S. Government Print- bia," in Technical Aspects of the District's Tax Sys- ing Office, 1976, 110 pages. tem: Studies and Papers Prepared for the District of 20 John D. Bowman, "Federal Restrictions on State Taxa- Columbia Tax Revision Commission, a volume sub- tion of Military Pay Revisited-A Note on Tax Avoid- mitted to the committee on the District of Columbia, ance Through Domicile Shifting Following Removal of U.S. House of Representatives, 95th Congress, 2nd the Withholding Prohibition," National Tax Journal, Sess., December 1978, pp. 261-98. March 1979, pp. 41-9. 39 See Bell, "The Federal Payment," op. cit., p. 272. In z1 Bowman, "Federal Restrictions," op. cit., pp. 42-45. cities like Portsmouth, VA, the federal exemption is 22 U.S.C. 105-10 (1970). even greater than in DC. 23 De facto services also go untaxed because of specific 40Distri~tof Columbia Self-Government and Govern- statellocal statutes regarding interjurisdictional taxing mental Reorganization Act, 93rd Congress, 1st Sess., of certain economic activities. ACIR, State Taxation of Washington, DC, 1973. Military Income and Store Sales, A-50, op. cit. 41 The available federal government resources are listed z4 For a discussion, see Michael E. Bell and Robert D. and described in Catalog of Federal Domestic Assis- Ebel, Financing an Urban Government, The Final Re- tance, Washington, DC, U.S. Government Printing Of- port of the District of Columbia Tax Revision Commis- fice, 1978, p. 147. sion, Washington, DC, 1978, Ch. 1. 42 1978 internal memorandum from the Georgia Depart- 25 1bid. ment of Community Affairs, "Department of Commu- 26 U.S. of America and Borg-Warner Corp. vs. Alex G. nity Affairs Impact Area Budget Package." Detroit, 355 U.S. 466, 78 S. Ct. 474 (1958). 43 U.S. Congress, Joint Economic Committee, Joint Eco- Z7 Phillips Chemical Co. vs. Dumas Independent School nomic Committee Report on the 1969 Economic Report District, 361 U.S. 376, 80 S. Ct. 474 (1960). of the President, Washington, DC, U.S. Government 28 EBS Management Consultants, Incorporated, Revenue Printing Office, 1969. Sharing and Payment In Lieu Of Taxes On The Public 44 U.S. Bureau of the Budget, Executive Communication Lands, a report prepared for the Public Land Law Re- No. 722 Regarding Payments in Lieu of Taxes, Wash- view commission, 1970, Washington, DC, National ington, DC, August 16, 1951. Technical Information Service, 1970, p. 126-27. 45Payments in Lieu of Taxes and Shared Revenues, a re- 29 ACIR, State and Local Taxation of Privately Owned port submitted to the commission on Property Located on Federal Areas, op. cit., pp. 15. Intergovernmental Relations, Washington, DC, U.S. 30 Several similar programs have expired over the last Government Printing Office, 1955, 197 pages. few decades and thus are not included in this dis- 46Public Land Law Review Commission, One Third of cussion. the Nation's Land: A Report to the President and to the 31 A more detailed analysis of P.L. 94-565 is contained Congress by the Public Land Law Review Commission, in a Commission report, The Adequacy of Federal Washington, DC, U.S. Government Printing Office, Compensation to Local Governments for Tax Exempt 1970. Federal Lands, A-68, July 1978. The subsequent prob- 47 ACIR, The Adequacy of Federal Compensation to Lo- lems with the acts are also discussed in depth in a fall cal Governments for Tax Exempt Federal Lands, A-68, 1977 General Accounting Office report to Congress, Washington, DC, U.S. Government Printing Office, Alternatives for Achieving Greater Equities in Federal 1978, 204 pages. Land Payment Programs, Washington, DC, U.S. Gov- 48 U.S. General Accounting Office, Alternatives for ernment Printing Office, 1979. Achieving Greater Equities in Federal Land Payment "'It is interesting to note here that in 1980 the State of Programs, PAD-79-64, Washington, DC, U.S. General Maine passed an act to implement the Maine Indian Accounting Office, September 25, 1979. Claims Settlement, which provides for Indians to make 49 Ibid.

Chapter 3

Statutory and Administrative Considerations

Thefederal government, acting through its agencies and instrumentalities, is exempt from state and local taxation on almost every activity it undertakes or item it owns. Moreover, the immunity may even be extended to third parties, with recipients of interest on the federal debt and construction contractors being the most significant examples from a statellocal perspective. Accordingly, in examining the federal PILOT issue from a practical public policy standpoint, the first requirement is to determine which statellocal revenue bases are operationally usable for designing a broad progam of federal payments designed to compensate states and localities for the negative effects of federal tax exemption. Once that determination is made, the next task is to examine whether that "tax" or PILOT base is one that should be adopted. To answer this policy question, the PILOT will be evaluated against generally accepted normative criteria for judging a revenue change. At the outset, it should be noted that there are two basic approaches to designing a broad federal payment system. The first would be for Congress to enact a payment in lieu of tax system. The second involves federal consent to statellocal real property taxation. For discussion purposes, the first approach is adopted here. Nevertheless, it should be noted that analytical determination of the payment base does not require maintenance of this PILOT vs. tax distinction; that is, the PILOT can be viewed as having all the economic attributes of a tax pay- Institutions, Not Persons ment. At the same time, by viewing the PILOT as a type of grant, one can focus more readily Like a tax, a PILOT might be classified and on substantive economic questions such as designed in a variety of ways. The two broadest those regarding (1) whether a is just an- classes could be derived first from the distinc- other grant-in-aid device being added to the tion between a PILOT that is based on long list of existing grant programs* and (21 using, or indirectly associated with, a govern- how the PILOT might best be administered. ment service and the government as an institutional entity separate-from the employees and CONCEPTUAL CLASSIFICATION the consumers of its services; and, second, a PI- Theoretically, a payment in lieu of tax could LOT that distinguishes between general and encompass nearly every state and local tax that specific payment programs. is foregone because of the federal presence. As For purposes of examining a uniform, broad- a starting point, one could accept the extreme based federal PILOT program, the "persons" theoretical case that if all federal property were vs. "institution" division is straightforward privately owned and in its highest and best and disposed of rather easily. Because the use, additional sales, income, property, inheri- intergovernmental tax immunities doctrine is, tance and estate, and other taxes would be col- with the exceptions noted in Chapter 2, no lected by states and localities. There would be longer manipulated to include persons who only two broad areas for tax base erosion: (I) have a derivative relationship with the U.S. those activities or property use categories to government,' no in lieu payment need be con- which states or local units have accorded full sidered for major third-party direct taxes such or partial exemption, even when in the private as the individual income and estate and inher- sector; * and (2) those properties and activities itance levies. Thus, in discussing a uniform PI- under statellocal government control. However, LOT, the justification, if any, must focus on the it should be noted that a case can.certainly be government as an institution. made for some form of in lieu payment on properties which are off the tax rolls due to ei- General vs. Specific ther ownership of, or mandates by a higher level of government (e.g., federal mandates to a The classification distinction for PILOT is subnational government, such as those in the somewhat more difficult to make in the "spe- District of Columbia, or the much more com- cific" vs. "general" context. As a guide, a spe- mon case of state-mandated exemptions from cific PILOT would be one that addresses a par- the local tax base). Indeed, several states al- ticular set of circumstances, whereas a general ready make compensatory in lieu of tax pay- payment would be designed to achieve comments to local governments. (See Volume 2.) prehensive coverage of all (or most) like gov- Despite its academic attractiveness, however, ernmental institutions or activities. Thus, the attempts to design a PILOT by such a compre- distinction here is based upon the scope and hensive view of the tax exempt base would be uniformity of the payment rather than the form operationally impractical and, in some cases, of payment. simply not worth the administrative effort in Of all the existing payment programs listed terms of its revenue generation. Moreover, a in Chapter 2, the only programs that can be comprehensive tax base approach would replaced in the "general" category are some of quire a high degree of speculation regarding the receipts-sharing programs and, perhaps, the eventual property owners and what their the Federal Impact Aid Program for local edu- incomes and wealth might be under this cation. The former group is so defined because alternative economic structure. the purpose of the payments is to recognize that the federal government is uniformly using *Examples are: full exemptions, such as those for certain broad classes of property for commer- museums and educational institutions, and partial ex- cial purposes. The Federal Impact Aid Program emptions, such as those provided to agricultural and conservation lands and to various businesses through might also be put in this "general" classifica- development tax incentives. tion, as the payments are based on categories which are generally uniform nationally. goods "purchased" by a system of compulsory This study examines the nature and charac- taxation is a practical dead-end. Indeed, it is teristics of a general PILOT that would be uni- those cases in which sales of goods and ser- formly paid on nearly every type of federal real vices can be easily identified and apportioned property to compensate subnational govern- among individual users that are used to delin- ments for the federal presence. eate private from public sector activity. The one general tax base that attaches to the PROPERTY TAX EQUIVALENCY federal government and is readily accessible to local government because of its immobility, By narrowing the PILOT base to one that can and for which valuation procedures are already be applied generally to private and federal in- developed, is the government's real property. * stitutions alike, it is still theoretically possible Accordingly, this base provides the most prac- to argue that at least the three major state and tical framework for designing a general federal local tax bases could be constructed-viz, the to statellocal PILOT. sales, receipts (income), and property bases. However, designing a PILOT that corresponds COMPUTATION AND SCOPE OF THE . to the first two of these is fraught with difficul- PAYMENT ties which stem from the tax base accessibility problems derived from both the economic The PILOT to be examined here is based on a function of government as a provider of public real property tax equivalency approach. That goods and the unitary administrative nature of is, the amount of the proposed PILOT is equal commodity procurement practices. For exam- to the dollar amount which the federal govern- ple, although the federal government does gen- ment's real property would yield were it fully erate income or receipts from its leasing of taxable under a jurisdiction's state and local public lands to commercial interests and then real property tax structure. The definition of provides for receipts-sharing with local gov- real property-i.e., levies designed to defray ernments, receipts-sharing is simply not appli- all or part of the costs of specific public im- cable to the bulk of federal activities. This fea- provements, such as street paving, sidewalks, ture follows from the simple fact that most and sewer lines that serve the government government agencies either do not generate re- pr~perty.~In adopting this framework for the ceipts, or, what revenue is generated is usually PILOT, it is explicitly understood that the U.S. in the form of a cost-of-service fee. The price government is to be treated as if it were a real paid for government publications, various property taxpayer. Thus, its property holdings business operating licenses, permits, airport are subject to the same definitions and landing fees, entitlement fees, EPA licenses, statellocal tax rates that apply to similar taxa- and park entrance charges are examples of the ble private properties and, where appropriate, latter. The problem with setting aside part of to one or more of the market valuation ap- these fee receipts as a form of receipts sharing proaches endorsed by the American Institute of is twofold: first, many fees are generally de- Real Estate Appraisers. ** These valuation signed as regulatory or public service rationing methodologies include: aids, not as revenue generators, and second, 1. those that are nonregulatory usually fail to pro- Cost Approach: the current cost of reproducing a property minus deprecia- duce even the revenue necessary to cover the tion from deterioration and functional costs-of-services provided by an agency. and economic obsolescence; The federal "sales" tax base is even more illusory. Theoretically, one could look at the *The tangible personal property component of the prop- federal government's current expenditure share erty tax base is not considered here. "The definition of what constitutes "real" property or of GNP and come up with some sort of total real estate varies among jurisdictions. For example, ju- sales or expenditure activity. But beyond this risdictions which do not levy a personal property tax point, the apportionment or allocation task be- tend to define real property more broadly than do those governments which levy both real and personal proper- comes unmanageable and unmeaningful. In ad- ty taxes. Usually the issue focuses on whether or not to dition, even defining the "sales" of public include various fixtures in the real property tax base. Market Approach: the value indicated by Among the excluded structures and fa- recent sales of comparable properties on cilities are: flood control and navigation; the market; and roads and bridges; reclamation and irri- Income Approach: the value which the gation; and monuments and memorials. property's net earning power will sup- No buildings are excluded from the PI- port. LOT base. In view of the data requirements needed for Together, these exclusions account for ap- valuation, more than one of these methods may proximately $68.6 billion, or only about one- be used. Of course, there will be certain cir- fourth of the total value of all federally owned cumstances for which one or more of these ap- property in the U.S. proaches are not applied. Indeed, for purposes Except for the historic sites, monuments and of valuing government-owned properties, the memorials, and the roads and bridges catego- income approach could rarely be applied (al- ries, all of these categories are excluded be- though, in the case of office buildings, the in- cause they are presently subject to the govern- come approach valuations of comparable pri- ment's only broad-based payment program as vate buildings may be appropriate "checks" for administered under the "open-space" land, an appraiser to use). On the other hand, the receipts-sharing, and guaranteed, per acre, market data approach may'prove quite useful minimum payment laws. for the many urban properties, including va- Excluding such open-space usage categories cant land. The most commonly used method, has the practical advantage of permitting the however, will be the cost approach. These cost- study to focus on payments for the federal gov- valuation problems are discussed later in this ernment property holdings which have not chapter and again, in detail, in Volume 2. For been examined before. In addition, there is now it need only be understood that the state some substantive justification for these elimi- of the art of real estate appraisal is such that nations in that much of this excluded property the "valuation problem" is not an obstacle to can be made subject to direct taxation of the designing or implementing a PILOT based on possessory interest, or to nonproperty taxa- real property tax equivalency. tion. Without cavil, however, it should be Similarly, conventionally accepted methods clearly stated that the exclusion of these open- for valuing special assessments and appor- space properties from this study should not tioning that value according to benefit may be necessarily be interpreted as a rejection of ar- adapted to government holdings. Clearly, as is guments for applying a tax equivalency ap- the case for any aspect of the PILOT, the spe- proach to all federal real property usage cate- cial assessment must be nondiscriminatory. gories. Indeed, there are good arguments both Thus, for example, the special assessments for maintaining this exclusion indefinitely or should fall uniformly on all owners who bene- eventually including open lands in a PILOT fit from the improvement, probably eliminating base. As noted in Chapter 2, the case for inclu- special levies established by negotiations be- sion has been made by both the Public Land tween the municipality and individual owners. Law Review Commission (PLLRC) and the U.S. General Accounting Office. The reasons for excluding historic sites, me- Exclusions From the Base morials, and monuments can best be justified by ACIR's judgment that these "unusual" prop- The following categories of real property are erties are likely to be excluded by Congress for specifically excluded from the base of the PI- purposes of administrative expediency; accord- LOT being examined in this report: ingly, it is acknowledged that a case can be Land exclusions include: property in the made for including these types of properties in public domain, property held in federal the base. The judgment to exclude was also trust; flood control and navigation; parks made on research grounds that, in order to pro- and historic sites; forests and wildlife; vide the most reliable and practical estimates reclamation and irrigation and grazing of the current value of federal property for this lands. report, parcels such as the Arizona Battleship Memorial or the United States Capitol have ception, they are marketed only in special situ- such a special purpose character that they ations. Moreover, most "U.S." highways are ei- could be eliminated. Although this exclusion is ther in national park areas or under statellocal not a serious one from an overall tax base per- jurisdiction (e.g., the interstate highway sys- spective, it does, of course, erode significantly tem) and could easily be excluded for other the PILOT base in some local jurisdictions reasons. (Washington, DC, is the extreme example). Finally, because of their quasi-federal status However, other real properties of a monumen- and the lack of usable cost data, trust proper- tal nature, such as various ornate "federal ties in custody of the federal government (e.g., buildings" (e.g., some old central city post of- the Smithsonian Institution and land of the In- fices, courthouses, and the Congressional office dian nations) are also specifically excluded. buildings), can-and should-be easily valued Once again, however, a case can be made for without regard to their ornamental features. In- including some trust properties in a PILOT deed, assessors commonly deal with this sort of base. * problem with respect to both currently taxable The Tax Rate and (when they are to be assessed) exempt properties. Regarding the latter, a practical so- Property tax discussions usually distinguish lution is to have the owner of the exempt prop- between "uniform" and "nonuniform" taxes. erty provide to the assessor a statement that Generally, the uniform tax is one for which the shows the original cost of the structure and of effective rate (the legislated or nominal rate any remodeling. These costs can then be inflat- times the assessment-sales ratio) applies to all ed to reflect current value.3 taxable real property. In contrast, nonuniform- Public domain lands were also excluded ity is introduced when different types of prop- from this PILOT base for practical reasons. erty are classified and taxed at different rates. The first and most important is that, al- Technically, few, if any, of the 13,43g5 pri- though there have been some isolated attempts mary real property assessing jurisdictions in to measure the value of the public domain, the U.S. adhere to uniformity. This is because, even the most basic acquisition cost data are when a specific class or type of property is nonexistent with respect to these lands (see singled out for preferential nominal rate or as- discussion in Volume 2). This lack of cost data sessment treatment (or when a special defini- arises from the unique judicial status of the tion is applied to "real property"), the effective public domain itself-i.e., all the area title rate on such property is lowered below that on which was vested in the U.S. government by other classes. These preferences vary, ranging virtue of its sovereignty and, thus, which has from various forms of residential tax relief never left federal ownership or was obtained in (e.g., circuit breakers and homestead exemp- exchange for public domain lands or timber on tions) to mechanisms designed to benefit spe- such lands4 cific business activities (e.g., preferential as- Second, an examination of the inventory of sessment for farmland and tax exemptions or the lands that constitute the public domain moratoriums on land andlor capital improve- shows that most of this property (forests, parks, ments). historic sites) falls under the open space cate- In addition to these "technical" considera- gories, which, for reasons discussed above, are tions, however, some jurisdictions have moved, already excluded from the PILOT base consid- either by statute or constitutional amendment, ered here. to explicit classification of different property- Roads and bridges are excluded for some of the same practical reasons noted above. The *The Smithsonian Institution clearly appears to present "unusual" characteristics of this usage classifi- a special case of abuse of the tax exempt status typically accorded federal and like private institutions (e.g., cation include its permanence as well as its museums). The institution's museum shops sell books, utility. Once constructed, it is no longer "va- gifts, and souvenirs through both over-the-counter and cant land;" yet it is really without market value catalog mail operations. Although this activity com- petes directly with like private institutions (including as it cannot be developed. Although air rights private operations which may lease space in one of the over transportation rights-of-way are one ex- museums), they pay no state, local, or federal taxes. types in order to influence the proportion of to- same time, when there are established legal cri- tal taxes allocable to each of the various teria and administrative processes for differen- classes. Usually the objective is to raise the tax tiating between similar properties-some of on business properties above other types. At which are taxable and others exempt-the fed- present, 11 states and the District of Columbia eral government should also be subject to these have comprehensive classified property tax tests. Thus, whereas the social club in the local system^.^ These include (with the date of im- YW-YMCA may be exempt, the private Elks plementation): Minnesota (1913), Montana Club is probably taxable on the grounds that (1917), Arizona (1968), Alabama (1972), Ten- the "Y" and the Elks social functions are, in nessee (1973), South Carolina (1976), Louisiana fact, dissimilar. Such criteria for a local differ- (1978), the District of Columbia (1979), and entiation then can be applied to determine Massachusetts and Ohio (1980). West Virginia whether a nonprofit Army-Navy Club on feder- (1934) achieves somewhat the same effect by al property may or may not be exempt from the specifying rate limits for different classes of PILOT base. property based on their residential character or An argument for always applying the higher geographical (municipal vs, nonmunicipal) lo- tax rate in those jurisdictions that classify their cation. In 1971, Illinois amended its constitu- real property tax follows from the point raised tion to allow counties of 200,000 or more per- in both Chapter 2 and the first part of this sons to adopt their own classification schemes, chapter-viz, the fact that the federal govern- and in 1973 Cook County did so. Legislation or ment exempts itself (and in some special cases, constitutional amendments for classification third parties) from nearly every other form of are also introduced periodically in other states. state or local tax. Thus, relative to other (real Finally, a site value tax might also be consid- property taxable) institutions, the U.S. govern- ered a form of classification since it achieves a ment already has preferential treatment. multirate structure by varying legal assessment It would be incorrect, however, to leave the ratios and levies by type of pr~perty.~ impression that there are no arguments for uni- These classified tax systems raise the issue of formly using the lowest (e.g., residential) rate. which tax rate to apply to the federal establish- Perhaps the most important is that it would ment in designing a PILOT program-an issue create pressures for real property tax uniformi- on which reasonable people may legitimately ty. For example, tax reformers-who point out disagree. The view adopted here is that, as long that much of the special preference legislation as the rate is applied generally to a class of (e.g., business tax incentives) only creates dead property most like the type owned by the feder- weight revenue losses for a local jurisdic- al government (i.e., usually commercial as option-might argue that, by having to provide posed to residential or agricultural), that rate the U.S. government with the lowest common should be used. This rate policy is not in any denominator of such tax breaks, special prefer- way designed as a fiscal expediency ence legislation would be more difficult to en- measure-e.g., an attempt to "soak" the federal act. Thus, any time some type of business re- establishment. Rather, the reasons follow from ceived special legislative consideration that adherence to the principle of treating the feder- reduced its effective property tax rate, so al government as if it were a normal taxpay- would at least one other taxpayer-the federal er-discriminating neither for nor against it government. vis-a-vis similar properties. Thus, if the gov- Conceivably, of course, this tax reform argu- ernment facility is an office building or ware- ment could cut another way. If one adopts the house in Cook County, it would be treated the view that more significant strides toward uni- same as the office buildings or warehouses lo- formity in real property taxation can be cated elsewhere in the county and taxed at the achieved by providing disincentives to states commercial rate. On the other hand, if the gov- to classify their property taxes, then putting ernment owned a veterans' hospital or sewage the federal government in the higher class as facility, there might be a case for using a lower an aggrieved taxpayer adds clout to the anti- (or zero) rate if similar private properties en- classification group. At this point, the likeli- joyed a partial (or full) tax exemption. At the hood of this political result can not be predict- ed. Much may depend on how mobile or gress changes its outlook on how these incen- powerful the U.S. government as taxpayer be- tives should be working, it will change the comes if the PILOT is enacted. Internal Revenue Code as it pertains to the tax There is a third possible solution to this rate- offset. Indeed, it did just that when the item- determination issue. A weighted average of all ized deduction allowable to individuals for the classified property tax rates could be com- state and local gasoline taxes was repealed for puted and then applied to the government's tax years beginning after 1978. property. This exercise would eliminate any Furthermore, rather than being a property tax likely problems of discrimination and yet en- or payment in lieu of tax issue, the federal off- able localities to derive some revenue benefits set provisions are fundamentally related to from their classified systems. However, other overall federal income tax and expenditure de- than for these two reasons, there is little to rec- cisions. If the Congress wished to make up its ommend the weighted average approach. Not revenue "loss" from the statellocal tax de- only would the principle of the federal govern- ductibility, it could raise the federal income ment as a normal taxpayer be abandoned; the tax rate. But those decisions to raise or lower administrative tasks, particularly for jurisdic- overall federal rates are made primarily with tions with overlapping taxing districts, would respect to their (1) stabilizing effects on the na- be formidable. Moreover, the tax rate paid by tional economy, and (2) distributional con- the federal government would now vary ac- cerns, such as the equity adjustment required cording to the commercial-residential mix of to offset the "inflation tax" effect^.^ For these the jurisdiction rather than by any adherence to reasons, the argument for adjusting the tax rate equity principles. to equal the average private taxpayer's federal One final point needs to be made. The use of offset is rejected. the rate applied to similar private taxable properties focuses on the level of effective tax rate OTHER ADMINISTRATIVE before the private taxpayer deducts property CONSIDERATIONS taxes paid in computing the federal income (corporate or noncorporate) tax due. Technical- Although there are implementation problems ly, one might argue that the PILOT rate should which need to be worked out in establishing a be discounted by a certain percentage in order PILOT-as there are with any new levy-these to take into account the fact that the federal problems would not be a barrier to the use of a government cannot give itself a federal income PILOT in the United States. Both the state of tax offset. This is an interesting argument and, the art of property tax administration in the once again, there is some room here for legiti- U.S. and the practical workings of the 30-year mate disagreement. The view taken here, how- old Canadian system of real property tax equiv- ever, is to reject such discounting. This deci- alency PILOTS for federally and provincially sion is based on the counterarguments that owned real property attest to this. What does deductibility provisions are, fundamentally, need to be discussed here, however, is the im- not property tax or, as extended here, PILOT is- plementation mechanism for a federal PILOT. sues. It is true that under these offset arrangements the U.S. Treasury currently "pays" part Valuation of the property tax bill of private taxpayers who file federal tax returns. However, the pur- The bulk of federal properties will not pre- pose of this deductibility provision is to give sent valuation problems with which assessors subnational governments incentives to use cer- are not already familiar in regard to private tax- tain types of taxes (e.g., income, property, able properties. * At present, the usage catego- sales) more intensively than others (e.g., user *According to one expert practitioner at the state level: fees, gasoline excises), as well as to provide "Valuafion of state-owned property according to the certain investment incentives to individuals. same standard applicable to taxable property has Not only does this incentive system strengthen proved to be a realistic basis for determining state aid payments." See remarks by Sidney Glaser, Director of fiscal federalism; it does so in a way that Con- the New Jersey Division of Taxation, "In Lieu Pay- gress feels is desirable. Presumably, if the Con- ments-New Jersey's Program," a paper presented to ries of most federal real property are fundamen- termine the value of federal property at the tally no different than those of taxable same time that private property is being as- properties. General Services Administration sessed. Under this arrangement, each taxing (GSA) estimates show that, as of 1978, the fed- authority would submit to the federal govern- eral government owned 406,949 buildings in ment (to a central office or to individual the United States with a gross area of 2.6 bil- agencies) a PILOT bill-in the form of a grant lion square feet, 89% of which is used for hous- application-stating the amount of the local as- ing (92% of that is for military personnel). ser- sessment, applicable "tax" rate, and expected vices, office buildings, storage, industrial and payment. If the federal government felt that the research work, and other institutional struc- payment was too high, one of two appeal pro- ture~.~Schools, prisons, and hospitals make up cesses could be used. The first would simply the remainder. employ the normal local administrative and ju- The nature of the federal land holdings is dicial appeal procedures available to any tax- much the same. Nearly all of the approximately payer. This approach is attractive, as it contin- 310 million acres covered in the scope of this ues to use existing bureaucratic and judicial PILOT are in uses (e.g., industrial, military mechanisms. However, it also has disadvan- base, power development and distribution) for tages: (a) normal judicial remedies, such as the which an assessor can readily apply the threat of tax sales of the property of tax delin- estimating techniques used for private land. quents may be difficult to enforce in the courts The bulk of the structures.and facilities the (and possibly unthinkable to Congress); and (b) government owns can be categorized as in it may overload some local courts in areas with power development and distribution (e.g., a large amount of federal property subject to TVA), utility systems, storage, and industrial the PILOT, thus undermining the purpose of its use. enactment. As noted in the earlier section on property The word "may" is emphasized in the above tax equivalency, the usual valuation proce- paragraph because the federal government can dures could be employed-recognizing, of now be subject to property tax delinquency course, that reliance would be placed on the penalties. Real property owned by the U.S. De- cost approach. partment of Housing and Urban Development Certainly, there are going to be problems (HUD) serves as an excellent illustration. HUD with some special purpose buildings and facil- often ends up owning single and multifamily ities. However, these properties are only a rela- (two to four) housing units when FHA income tively minor part of the total property requiring properties are foreclosed. * As owner of this assessment. Moreover, numerous special- property, HUD pays real estate taxes and spe- purpose private properties also exist, and are cial assessments which were liens on proper- assessed, in jurisdictions throughout the counties at the time of conveyance to HUD, or try. which are levied on HUD-acquired properties after conveyance. HUD then continues to pay Federal or Local Assessment? real estate taxes and special assessments until the property is sold to a new owner. In those The U.S. government could set up a new bu- areas that have homestead exemption privi- reaucracy t; determine the value of federal leges, local HUD offices are to assure the con- property throughout the country. Such a plan tinuation of that exemption. would place maximum control in the federal If tax bills and special assessments are not establishment, but that is about all there is to paid within the time required by law, HUD be- recommend federal assessment. comes subject to delinquency penalties. Ulti- The obvious alternative is to relv heavilv on mately, if the delinquent tax bill andlor special the existing local assessors and auditors to de- assessment and the resulting penalty are not the Annual Meeting of the International Association of paid, the property may be sold by the local Assessing Officers, Detroit, MI, September 30, 1980. Also see the formal testimony by Jerry Emrich and *HUD-owned single-family properties, due to foreclo- Douglas H. Clark before the ACIR, June 19, 1980. sures on FHA single-family properties, numbered (Witness statements, this volume.) 26,653 in 1978 and 20,728 in 1979. taxing authority to recover these debts. When a real property tax (but not special assessments) HUD property is sold for tax delinquency, in- indirectly through rental agreements. Although ternal HUD regulations require that the local most of these-23,000-operate under simple HUD officials determine whether the value of market rental arrangements, 5,000 of the build- the property makes it "economically advanta- ings (the large ones which account for more geous to recover the property" by issuing a than half the total square footage of all USPS voucher for tax payment.1° These regulations buildings) operate under automatic property also state that, in order to prevent tax sales and tax escalation clauses, a practice which began the resulting court costs, local area offices must in the 1950s. maintain close contact with the local taxing au- Obviously, the Postal Service wants to be thority to determine if delinquent taxes andlor sure that local assessors do not make a practice special assessments are outstanding." of overassessing the private buildings that hap- An alternative approach would be to follow pen to house their service. This is particularly the Canadian example by setting up a special true for the buildings that are rented under a federal real estate board (or office) to review pass-through tax escalation arrangement. Ac- the local governments' assessments. If, upon cordingly, the assessments on these leased fa- review, the board felt the properties in ques- cilities are reported to the USPS offices in tion were being overassessed, a downward ad- Washington, DC, where they are reviewed. If justment, to which there could be no local ap- deemed necessary, appeals are filed. Of course, peal, would be made. the very fact that it is widely known that this For those who would oppose establishing a review is made has the effect of influencing federal real estate board as evidence of a fur- some local jurisdictions (which might other- ther buildup of the federal bureaucracy, four wise not be so inclined) to maintain impartiali- points should be made to allay fears that it has ty in assessing two similar private build- to be that way. ings-one used by USPS and the other for First, at surprisingly little cost, it is possible private activities. for the U.S. to have a parcel-by-parcel and Third, not only has the federal government, agency-by-agency accounting of the current through the USPS, had experience with pay- value of its properties-even though such rec- ing, reviewing, and appealing local property ords are not now maintained. Using an inven- taxes; so have many multistate and multina- tory of the location and original cost of each tional business firms which might also be federal building, structure and facility, and viewed by some as targets for high tax assess- land parcel, ACIR has developed a cost- ment. Yet these circumstances have not led to trending method that could be used to estab- large real estate bureaus within these firms. lish a file of the value of U.S. government real The American Telephone and Telegraph Co. is property holdings on a property-by-property a good example. Although AT&T has leased basis (see Volume 2). Of course, this trending and owned properties throughout the nation, approach would eventually be replaced by su- all property tax appeals are simply dealt with perior actual field (assessment) data. in the locality where the property is located. To Second, the idea of the federal government date, AT&T has not seen the need to set up a reviewing and, when necessary, appealing, the central real estate tax office even though it property tax it would pay is already an ongoing pays millions of dollars in real property taxes process. Perhaps the best example is that annually. carried out by the U.S. Postal Service (USPS). Finally, there is the Canadian experience. Al- Currently, the USPS operates out of approxi- though the Canadian intergovernmental frame- mately 31,500 buildings (from post offices to work admittedly is far simpler and less over- storage and bulk mailing operations) in which lapping than is the American system (the there are often elaborate structures and facili- Canadian federal government has to deal with ties for distributing the mail. Of the total, 3,500 only about 2,500 taxing authorities-one-fifth of the USPS buildings are government-owned of the number of primary assessing authorities and thus tax exempt. The remaining 28,000 are in the U.S.), the federal review process is gen- leased. All of these leased buildings pay the erally considered to have worked smoothly in that country. Some federal vs. local difference ed "anywhere from 12 months in advance of of opinion has occurred regarding the dollar the start of the fiscal year to 130 years before- valuation of federal property, but these differ- hand."lS ences represent a very small proportion of the total number of federal properties included in Jurisdiction Receiving the Grant the Canadian PILOT program.12 In cases of continuing disagreement, the Minister of Fi- Real property taxes in the U.S. may be levied nance receives a formal appeal and then either by any one of several jurisdictions. Two gener- relies on the advice of his valuation officers or al procedures are available for distributing any calls in an outside consultant. This latter pro- federal PILOT: All payments either go to the cedure has been used only three times since state for its determination of the distribution the inception of the program in 1950.13 formula or directly to the local government. The exact nature of this second procedure will Timing vary according to the statellocal intergovernmental and property tax systems. For example, If a PILOT is enacted, it should be made clear if the second approach is taken in a state where early in the legislative process that the federal the county assessor, clerk, or auditor is the government will be a prompt payer of the chief collecting official, the county would col- grant, and that the grant process will be simple lect the PILOT and then-just as is done for all enough that it can benefit large and small juris- property taxes-parcel out the PILOT to cities dictions alike. This point is not made just to or townships, school districts, park districts, belabor the obvious. Recent research on the na- county, and the like. The distribution would be ture of federal categorical grant programs con- made in amounts of the payment level voted cludes that a major reason for the federal gov- upon at each local unit (assessed value x town- ernment's failure to get grants to many of the ship rate for townships; assessed value x needy communities, in accordance with Con- school districts levy for schools, etc.). In states gressional intent, is the "myriad of costs in- with a single taxing authority (e.g., Hawaii's volved in seeking and receiving federal grant counties), the payment would simply be made assistancew-costs which communities with to that level of government alone. the greatest need and smallest fiscal and Such a mechanism would keep the PILOT planning capacity simpIy cannot afford.14 within the "as if it were a property tax" mode. The obvious policy implication here is that a Nevertheless, a case can also be made on feder- PILOT, if enacted, can and should be designed al administrative grounds (reducing the num- to be implemented at a minimum of cost to ber of recipient taxing authorities to 51) that both the U.S. government and the recipient the entire PILOT amount-the sum of that cal- statellocal jurisdictions. The evidence is that culated at each local taxing unit (township this would require an unconditional "no- share + school share + county share, etc.)-be strings" payment. paid directly to the state government for distri- Regarding the timeliness of the payment, bution according to factors ranging from the there should be no doubt in the minds of local nature of state school aid formulas, circuit officials about the federal government's author- breakers financing, and the like. It might be ity to fund the program. Currently, about 70% noted, however, that if this state redistribution of federal spending is already determined by method is .adopted, it will somewhat weaken some kind of advance funding decision. Ac- the argument that the PILOT must be in the cording to a recent report of the Congressional form of an unconditional grant in order to Budget Office, Congress provides those moneys reach small and large local government juris- in the current year which may have been fund- dictions alike.

lTax Foundation Inc., Special Assessments and Service FOOTNOTES Charees in Municipal Finance, Washington. DC, Tax ~ouidationInc., 1h0. For a general review of the eco- 'Graves vs. New York ex. rel. O'Keefe, 306 U.S. 466, 59 S. nomic and legal status of special assessments, see Oli- Ct. 595 (1939). ver Oldman and Ferdinand P. Schoettle, State and Lo- cal Taxes and Finance, Mineola, NY, The Foundation ernments, Washington, DC, U.S. Government Printing Press, 1974, pp. 412-42. Office, November 1978, pp. 24-25. 3William S. Goodyear, "Assessment Problems Created By 9GSA, Summary Report of Real Property Owned by the Exemption," The Proceedings of the Seminar of Proper- United States Throughout the World as of Septem- ty Off the Tax Rolls, National Conference of State Legis- ber 30, 1978, GSA Office of Administration, various ta- latures and The International Association of Assessing bles. Officers, Denver, CO, June 2-3, 1980. 1OU.S. Department of Housing and Urban Development, 40riginal public domain lands that have reverted to fed- Property Disposition Handbook, One to Four Family eral ownership through operation of public land laws Properties, Processing of Tax Bills, July 1978, 4310.2 are also included in this definition. The definition used Rev., pp. 1-3. here is that provided in the General Services Adminis- "Ibid., p. 2. tration's Summary Report of Real Property Owned by 12Communication from Douglas H. Clark, Assistant Di- the United States Throughout the World as of Septem- rector, Federal-Provincial Relations Division, Depart- ber 30, 1978, Washington, DC, U.S. Government Print- ment of Finance, Canada. A similar federal-local prop- ing Office, 1979, p. 2. erty tax payment for federally owned land is also 5U.S. Department of Commerce, Bureau of the Census, common in some European countries-for example, in State and Local Ratio Studies, Property Tax Assess- Sweden, the Netherlands, and the United Kingdom. ments and Transfer Taxes, Fall 1980, Table 1. 'Wnpublished memorandum provided by Douglas H. 6International Association of Assessing Officers, Re- Clark, Assistant Director, Federal-Provincial Relations search and Information Services, Bulletin, "Classified Division, Department of Finance, Canada. Property Tax Systems," Chicago, IAAO, 1979, 18 pages. 14Robert M. Stein, "Federal Categorical Aid Equalization In November 1980, Ohio voters approved a constitu- and the Application Process," a paper presented at the tional amendment permitting the two classifications of Annual Meeting of the American Society of Public Ad- (1) agriculture and residential and (2) all other property. ministration, Baltimore, MD, April 1979, p. 16. 'A review of the various forms of classification is provid- l5See the report of the Congressional Budget Office. Ad- ed by Steven David Gold, Property Tax Relief, Lexing- vance Budgeting: A Report to the Congress, Washing- ton, MA, Lexington Books, 1979, 331 pages. ton, DC, U.S. Government Printing Office, 1977; and 8The U.S. Bureau of the Census reaches a similar conclu- the discussion by Margaret J. Moore in Michael E. Bell, sion. In its definition of the effective property tax rate it "The Federal Payment to the District of Columbia," in reduces that rate to reflect homestead exemptions but Technical Aspects of the District's Tax System, Com- not circuit-breaker tax credits or rebates, since the "lat- mittee on the District of Columbia, U.S. House of Rep- ter are commonly associated with administration of the resentatives, 95th Congress, 2nd Sess., income tax." U.S. Department of Commerce, Bureau of Washington, DC, U.S. Government Printing Office, De- the Census, Taxable Property Values and Assess- cember 1978, pp. 291-93. The 130-year reference is ment-Sales Price Ratios, Vol. 2, 1977 Census of Gov- quoted verbatim from the CBO report, p. 9.

Chapter 4

Conceptual Issues: Rationale and Alternative Forms of Measuring the Payment Base

THE BASIC FRAMEWORK

1n fiscal 1980, the U.S. government provided an estimated $89.8 billion in grants-in-aid (categorical plus General Revenue Sharing) payments to state and local governments. In addition, $4.1 billion of tax expenditures will accrue to states and localities in the form of subsidies resulting from the federal tax exemption for interest paid on state and local debts.' In total, that is $93.9 billion in federal assistance, an amount that equals an estimated 30.5% of own-source revenue collected by state and local government^.^ Because the federal aid role has become so large in the statellocal context (in current dollar terms it doubled during the decade of the 1970s), there must be strong economic justification to enact another federal payment program, such as a tax equivalency payments in lieu of taxes program which, in 1978, would have cost the U.S. Treasury another $3.65 billion. In economic terms, if a payments in lieu of taxes program simply adds dollars to the federal government's existing aid structure without being justified on its own merits as an entirely new program, the PILOT payments would do little more than add to the complexity of the intergovernmental fiscal system. Polit- ically, such a finding would and, in fact, should, keep the payments in lieu of taxes from receiving serious Congressional consideration-particularly in an era of budgetary con- Recognizing the difficulty of distinguishing straint in which federal aid programs in gener- between intended and actual purposes of federal, and unconditional grants in particular, are al grant programs, grants can additionally be receiving a cool reception on Capitol Hill. classified according to whether they provide Within that policy context, this chapter first for social, economic, andlor fiscal needs. Each summarizes the nature of the existing grant-in- of these purposes is discussed briefly below.3 aid programs and then examines the proposed Providing for social needs: allocating re- payment in lieu of taxes. The finding is that a sources to state and local governments in payments in lieu of taxes program would not order to provide the mix of public goods overlap the scope and purpose of existing fed- and services which Congress deems de- eral aid arrangements. Given this conclusion, sirable and for which state and local gov- the conceptual justification for a tax equivalen- ernments are seen as the institutional cy program and the alternatives to this method units best able to meet the requirements of determining the payment base are examined of their residents. Indicators of social more closely. need include the percentage of poor fam- Nature of Existing Grant Programs ilies and individuals living in a jurisdiction, the crime rate, per capita income, There are two basic types of grants-in- and measures of the quality of housing. aid-conditional (or categorical) and uncondi- The list of federal aid programs designed tional (or block). The former is by far the larger to address these social needs is enor- of these two divisions (aproximately 90% in FY mous, ranging from historic preservation 80), and comes with a series of use restrictions grants, aid for educational television, and designed to encourage the states and localities acquisition and alteration of senior citi- to expand the supply of certain public services. zens facilities, to civil defense and safety Thus, the recipient government gives up con- training programs and a variety of hous- siderable fiscal independence, which is re- ing rehabilitation and construction produced even further if, as is usually the case, grams. matching requirements are included in the Providing aid to areas experiencing struc- grant. tural economic need: grants intended to The unconditional grant may be spent in any ameliorate the effects in such areas of a way the recipient government chooses, includ- declining economic base resulting from ing supplementing program services, provid- business and residential migration being financing revenue, covering expenditure tween cities and suburbs andlor between gaps, or enacting tax cuts. Included in the un- regions of the nation. Indicators of eco- conditional category is the General Revenue nomic need include changes in popula- Sharing (GRS) program ($6.9 billion in FY 80) tion (losses), per capita income, and the and some of the ad hoc payments in lieu of employment composition (e.g., losses in taxes listed in Chapter 2. If a uniform tax- manufacturing relative to the service sec- equivalency payment program for property tor) of the area. Community development taxes were to be enacted, administrative and grants (e.g., the Urban Development Ac- theoretical considerations would argue that it, tion Grant, Community Development too, should be unconditional. Block Grant), education, training, and Identifying federal assistance programs as technical assistance programs (e.g., Com- conditional or unconditional, however, does prehensive Employment Training ser- not provide enough information to determine vices, Technical Assistance Research), and whether the payments in lieu of taxes would special community impact grants (e.g., simply duplicate other grant programs. The Special Economic Development and Ad- classes of problems that grants are intended to justment Assistance) are examples of the address should also be examined, so that a de- federal assistance programs targeted to termination can be made regarding which, if alleviate economic problems. any, of these areas would also be addressed by payments in lieu of taxes. Meeting financial need: providing relief to governments, usually urban, to help Similar findings have been made with re- them cope with fiscal stress as mani- spect to the General Revenue Sharing (GRS) fested by indicators such as low liquidi- Program. Because these funds are initially dis- ty, large debt, unusually high tax effort, tributed under either one of two formulas, both and unbalanced budgets. Federal pro- of which specifically take into account fiscal grams targeted to fiscal need concerns in- and economic indicators (e.g., tax effort, urban- clude General Revenue Sharing, loan ized population, and state personal income tax guarantees (New York City), growth im- collections), the GRS program is most respon- pact grants, and some of the in lieu tax sive to city fiscal need-as was intended.' But payments discussed in Chapter 2. GRS funds are also well-targeted to municipal- Clearly any classification of problems and, ities which have high index of economic need. therefore, the general purposes of grant programs, will be somewhat arbitrary, as social, Nature of Proposed PILOT Grant economic, and fiscal needs may be closely re- Program lated to one another. For example, as the central cities in the U.S. continue to experience The obvious question that follows is wheth- both population and job loss-an economic de- er a payment in lieu of taxes program would cline problem-social problems of crime, pov- also have these conditional or unconditional erty, abandoned housing, and the like may be grant characteristics. Analytically, the question exacerbated. At the same time, fiscal stress will to be addressed is: as a general rule, does the worsen as the tax base shrinks and costs will presence of federal tax exempt real property rise because of a rigid public personnel system significantly explain the existence of social, and a growing proportion of low income resi- economic, or fiscal problems in local jurisdic- dents in the population. Fiscal ills may, in tions? turn, give added impetus to the population and The answer is no, and is supported on both job loss phenomena. theoretical and empirical grounds. Just as these problems are cyclical and An explanatory relationship between the in- overlapping, so are the effects of the federal cidence of the value of federal real property in grant programs designed to address them. For a given jurisdiction and the various community example, the Antirecession Fiscal Assistance "needs" cited above should not be expected for Program, initiated in 1976 but not extended in several reasons. There is little doubt that many 1978, was found to be effective in targeting of the municipalities experiencing the econom- funds to cities with serious problems of eco- ic, social, and fiscal problems are also those in nomic base decline, as well as to those cities which there are large amounts of nontaxable experiencing severe budgetary difficulties. Not federal real property. The fundamental reasons only were these grants substantially larger in for the "need" problems, however, can be areas with high unemployment rates (the eco- traced to factors such as reduced national pop- nomic problem); they also tended to go to the ulation growth, reduced costs of commuting large city governments that were experiencing from suburb to city, changes in consumption as severe fiscal straine4A similar conclusion can well as product technology, the changing com- be reached regarding the Local Public Works position of the private industrial base, and the Program.5 The purpose of this grant, autho- consequences of federal government policies rized in 1976 ($2 billion) and then again in 1977 that have promoted suburba~ization(e.g., the ($4 billion), was to stimulate the national interstate highway system, FHA mortgage in- economy by funding small-scale, quickly com- surance, and the deductibility of mortgage in- pleted local government public works projects. terest payments from the income tax). The distribution of this aid was based on fac- Certainly, the presence of federal tax exempt tors of both economic and fiscal need. Al- activities would be expected to worsen some of though the funds were initially targeted toward a municipality's problems-particularly finan- cities with high unemployment, a study by the cial. Nevertheless, the fact remains that, except U.S. Treasury found that the largest per capita in a relatively few extraordinary situations grants also went to large cities experiencing se- where the federal government dominates a vere financial difficulties.6 community tax base (e.g., Kitsap County, WA; Portsmouth, VA; New London, CT), the federal necessarily functional) relationship. These government's tax exempt presence is not the "significant" relationships are noted by an as- significant root cause of financial or social and terisk ( *). economic community distress. One must be careful not to place too much EMPIRICAL ANALYSIS reliance on the interpretations of these statistical findings. Nothing is "proved" by them, The foregoing conclusions are borne out by an and, when a statistically significant relation- empirical testing of the hypothesis that the ship is shown to exist, this does not necessarily value of federally owned real property is not mean that there is a functional or cause-effect significantly related to a community's social, relationship. Given these caveats, Table 7 does economic, or fiscal health. In slightly more provide some important findings. Overall, it technical jargon: these community needs are supports the original hypothesis that there is not shown to have a positive or negative asso- no significant relationship between the value ciation with the amount of federal tax exempt of federal property within municipal bounda- property. ries and indicators of social-economic need (the first three municipal characteristics Municipalities listed). The lack of a relationship between the three fiscal need indicators and federal proper- In order to test the hypothesis, correlation ty is somewhat less clear. There is a significant coefficients (product moment) between the association between municipal debt and feder- value of all federal real property (land, build- al property in the 45 largest cities, although ings, and structures and facilities) and need this relationship fails to show up in the sample ("municipal characteristics") were estimated of all U.S. cities with populations greater than for two sets of data: the 45 largest U.S. cities 25,000. Of particular interest here is the find- and a random sample of 40 communities having that for both sets of cities examined, per ing a population of more than 25,000. The re- capita property tax burdens are not associated sults of these correlations are presented in Ta- with the amount of federal tax exempt property ble 7.8 In this table two numbers, one listed within a jurisdiction's boundaries. * This find- above the other, appear with each of the mu- ing is consistent with those provided in the nicipal characteristics. 1978 ACIR study-that the extensiveness of The first is the (linear) correlation coeffi- public land within a jurisdiction does not sig- cient, which provides a measure of closeness of nificantly influence the tax burden of the peo- the relationship between the value of federal ple who reside within that jurisdi~tion.~ property and the municipal characteristics. What are the policy implications of all this? Note that all of the coefficients are quite small First, and most important, a payments in lieu and the associated relationship is either posi- of taxes based on the value of federal real prop- tive (+) or negative (-). erty would not be just another grant program. The second number, in parentheses, is the "significance level" associated with the corre- It is not designed to substitute for existing programs, including General Revenue Sharing. lations, measured at a "95% confidence level." The only reason for referring to the payments What this says is that any time the number in in lieu of taxes as a "grant" is to distinguish it the parentheses is greater than, or equal to .05, legally from a tax so that by its enactment the there is only one chance in 20 (or five out of U.S. government may avoid admitting a legal 100) that the finding here-a lack of a mean- taxpaying obligation. ingful relationship between federal property Second, and a point closely related to the value and the municipal characteristics-is first, the argument presented in Chapter 3 for nonrandom. That is, whenever this number in an unconditional payment in lieu of taxes is the parentheses is greater than, or equal to .05, still based on the administrative advantages of one can conclude, with a 95% degree of confidence, that no statistically significant relation- *Since debt generally finances capital improvements, ship is observed. Conversely, when those num- debt burden can be viewed as similar to "tax" burdens. If this view is accepted, the data indicate there bers are less than, or equal to .05, one can is, at least for the largest cities, some federal property- conclude that there is a significant (though not fiscal need association. Table 7

CORRELATION BETWEEN SELECTED MUNICIPAL CHARACTERISTICS AND THE TOTAL VALUE OF ALL FEDERAL REAL PROPERTY WITHIN MUNICIPAL BOUNDARIES FOR THE 45 LARGEST U.S. CITIES AND A RANDOM SAMPLE OF 40 U.S. CITIES WITH A POPULATION GREATER THAN 25,000, 1978 Correlation Coefficient Municipal Characteristics Largest 45 Cities Sample of 40 Cities Percent of families below poverty .016 - .I39 level (.457) (. 1 96) Percent of individuals below poverty .I71 - .002 level (. 129) (.494) Percent of households without adequate - .230 - .I99 plumbing (.064) (.log) Percent of general revenue from the .032 - .I39 federal government (.416) (. 196) (dependence on federal aid) Per capita property taxes .019 (.449) Per capita municipal debt .312* (.020) Median value of owner-occupied homes .063 (.338) Median gross rent, renter-occupied units ,060 (.346) Total federal employees .728* (.OOO) Civilian labor force .I68 (. 1 35)

Indicates a statistically significant relationship exists at the .05 level.

SOURCE: AClR staff computations. this approach and a recognition that the pay- Urban Counties ment in lieu of taxes permit the federal government to act as if it were a local real property The lack of a meaningful relationship be- taxpayer. tween the value of federal real property and the And, third, although the state or local reve- two sets of U.S. municipalities indicates that it nues generated from a payment in lieu of taxes is important in order to understand not only will certainly help some cities meet their fiscal the likely economic characteristics of a pro- and public service needs, the payment in lieu posed PILOT paid on the basis of these propsr- of taxes cannot be justified on these grounds. If ty values, but also its urban policy implica- Congress is concerned about such problems, tions. Accordingly, to provide a check on these and it has shown that it is, then it should con- results, a similar empirical analysis was continue to focus on existing types of aid pro- ducted for all of the nation's 315 "central grams, unconditional as well as conditional. As urban counties." far as the payment in lieu of taxes goes, it A central urban county is that single county needs and has its own justifications, which are determined by the U.S. Bureau of the Census to addressed below. represent the most densely populated and developed area within a standard metropolitan statistical area (SMSA). In nearly all cases this Table 9 central urban county is the one county associated with the central city of the SMSA. REGRESSION MODEL AND The data are presented in Tables 8 and 9. ESTIMATES FOR TOTAL Table 8 provides the simple correlations (zero- REAL FEDERAL PROPERTY order relationship) between the value of federal Standardized real property and various socioeconomic varia- Regression bles. * Note that in this analysis (Table 8) the Variable Coefficient relationship is tested at both the 90% and 95% Population per square mile significance levels. Percent individuals poor Table 8 shows that, except for the "percent Percent household without plumbing individuals poor" and "percent [county] gener- Median owneroccupied home value Median gross rent, renteroccupied units al revenue from federal government," the rela- Percent general revenue from tionship between the value of federal real prop- federal government erty and various socioeconomic indictors is Per capita property tax significant. Per capita debt This finding of a large number of significant Total federal employees bivariate relationships required that the data be 'P s .05 examined in greater detail. Thus, Table 9 re- SOURCE: AClR staff computations. ports the results of a regression analysis with the value of federal real property as the dependent variable and the socioeconomic indicators as the independent variables. The resulting "standardized regression coefficient" is *These variables are similar to those presented in Ta- the same as the partial correlation coefficient: ble 7. Civilian labor force and percent of poor families were not reported on the computer tapes provided by it defines the relationship between the real Census; thus they are excluded from this analysis. property value and each of the socioeconomic measures when the effects of all the variables in the model other than that one being tested Table 8 are held constant. The results reported in Ta- ble 9 thus offer a clearer understanding of the CORRELATION BETWEEN SELECTED relationship shown in Table 8. Four of the six URBAN COUNTY CHARACTERISTICS previous significant relationships (i.e., density, ANDTOTALVALUEOFREAL housing without plumbing, median gross rent, FEDERAL PROPERTY WITHIN and per capita debt) are seen to be statistically COUNTY BOUNDARIES insignificant when controlling for the effect of other socioeconomic indicators-i.e., when the Need Indicator Correlation statistical effect of each of the other indicators Population per square mile ,348" listed in Table 8 is accounted for. This finding Civilian labor force N.A. suggests that the relationships in Table 8 were Percent families poor N.A. due to the whole set of socioeconomic indica- .007 Percent individuals poor tors and not just the particular one being test- Percent households without plumbing - ,165" Median owneroccupied horn value 345" ed. * Put another way, if each of the nine indi- Median gross rent, renteroccupied units .230" cators in Table 8 is examined for its rela- Percent general revenue from tionship with federal real property, while federal government ,000 at the same time eliminating the effects of the ,114' Per capita property tax other eight indicators, the significance of the Per capita debt ,212" Total federal employees .873' relationship is diminished. Only the number of

' P s .05 *This second test for partial correlations was not neces- "P s .O1 sary when the municipal date (Table 1) were run, as SOURCE: AClR staff computations. there was little evidence of a significant relationship between property values and each indicator even when the other indicators were not accounted for. federal employees retains its robust relation- quires andlor uses real property in a jurisdic- ship with federal property value. This lack of a tion, taxes are paid to that jurisdiction as the statistically significant relationship when price for a set of public services. The exact na- urban central county data are used is consistent ture and rationale of the tax payment and the with the findings presented for municipalities relationship between the taxpayer activity and in Table 7. the type of service received will vary according to the mix of revenue sources used by the gov- CONCEPTUAL JUSTIFICATION FOR ernment and the institutional characteristics of ENACTING A PAYMENTS IN LIEU OF the beneficiary of the public sector activity. TAXES Thus, public policymakers must attempt to set tax prices according to the cost of providing a Because the PILOT has the economic charac- service, the fiscal needs of the taxing authority, teristics of a tax payment, it is not surprising andlor some normative policy decision regard- that the criteria for evaluating whether it ing how the tax burden ought to be distributed. should be made a permanent part of the At the national, or even state, level, the range intergovernmental fiscal system conform to the of tax tools available to accomplish these poli- criteria one would apply when judging the cy goals is fairly wide. It includes broad-based merits of other forms of broad-based state or lo- levies, such as the payroll, personal income, cal taxes. Within this framework, the critical and corporate profits levies, and the narrower questions focus on issues of equity, efficiency special excise, employment, and import taxes. or neutrality, revenue productivity, fiscal ac- The accessibility to this range of taxes follows countability, and feasibility of administration largely from the fact that for tax purposes a na- and compliance. The last of these, the adminis- tional government-with its authority to re- trative and compliance issue, was addressed in strict the flow of economic activity across its Chapter 3, with the conclusion that the tax borders (through devices such as migration equivalency payments in lieu of taxes program controls, investment regulations, tariffs, quo- could be implemented within existing proper- tas, and import licenses)-operates in an es- ty tax administration systems. From the sentially "closed" economy. As a result, factor statellocal viewpoint, not only has the required and goods mobilities have not become a major administrative mechanism long been in place; consideration of national tax policy. * local officials have generally demonstrated an For the state and, especially, the local, gov- ability to handle the sort of problems (e.g., ernment, however, the range of available tax valuing tax exempt as well as special purpose sources is greatly restricted because of the high properties) likely to arise in assessing the fed- degree of "openness" of the economy. Unlike eral property base."J As for compliance, the the national government, a subnational econ- federal government would have to establish omy cannot employ the sort of devices listed certain review mechanisms; but, as has already above in order to constrain the interjurisdic- been pointed out, unless the federal establish- tional movement of the factors of production ment were to follow the path of setting up its and goods and services across its borders. Con- own assessment mechanism, the whole federal sequently, this resource and product mobility program could be carried out at little cost. changes the character of subnational (local) tax The other four concerns-equity, efficiency, policy from that of structurally similar national revenue productivity, and accountability-are policies. * * discussed below. The discussion of the revenue One obvious implication of this openness is productivity topic is confined to the conceptu- that nonresident individuals and institutional al role the payments in lieu of taxes would play in the intergovernmental system. The detailed *This feature also explains why policies designed to quantitative analysis is the subject of Chapter change personal income distribution through a tax 5. system (e.g., with personal income, inheritance and estate taxes) are more appropriately a national than a Equity state or local concern. * *Although this open economy argument extends to the state level, the-remainder of this discussion pertains When a private individual or business ac- to local government. entities (business and government) cannot be vices, the fact remains that, as now structured in taxed effectively on their income, wealth, or the U.S., local government might not even exist wealth transfers. Similarly, residents (persons without the property tax. Adopting this and institutions) can engage in spending out- view-which is wholly legitimate, given the side the local jurisdiction-including pur- importance of real property taxation to local chases of goods originally produced in the government-the property tax-service benefit locality-and therefore avoid direct payments relationship should be interpreted in a much under conventional sales and other consump- broader framework than is implied by a narrow tion taxes. quid pro quo between the real property tax As a result, the local government is forced to paid and site services received directly. rely largely on revenue devices for which there Given these considerations, two questions are not only some identifiable benefits received arise regarding the tax exempt status of the fed- or quid pro quo relationship between the tax- eral government-viz, can the benefit criteria, payer and the jurisdiction, but which are also as broadly interpreted, be used to justify a fed- readily accessible (e.g., immovable). Thus, eral to local "tax" (i.e., PILOT) contribution? taxes traditionally identified with benefits and Does the federal government receive the bene- accessibility have become the mainstay of local fits of statellocal government services? The revenue systems. Examples include user fees, questions are merely rhetorical: of course the incorporation fees, specific privilege lev- federal establishment, as a property owner, re- ies-and that classic of the immovable tax ceives a wide range of services. Moreover, the base, real property taxes. bulk of services received are the same as for the Unreimbursed Service Costs private taxpayer. Viewed either as an institutional entity or as Whether the real property tax is a truly a group of workers, the U.S. government enjoys benefit-type levy in the narrow sense of having the benefits of local government supplied po- a quid pro quo relationship to site-oriented lo- lice and fire protection, public health, and san- cal public services is a legitimate topic for de- itation facilities. Less obvious, but certainly bate (the basis for discussion varying from city important, are some of the indirect costs to city). Certainly, the nature of the flow of incurred on behalf of the federal establish- property tax financed services varies between ment-costs which for some communities may recipients by type and size. For example, re- be quite significant. Examples abound: the lo- garding the former, it is worth observing that, cal government may have to add to the capacity whereas judicial, police, fire, education, and of its physical infrastructure (e.g., airport, general government services tend to be provid- highways, roads, sewers), incur additional ex- ed to residential and nonresidential property penses in its transportation authority, or in- owners alike, some localities may limit an easi- crease its education and social services budget, ly "divisible" service such as trash collection just to facilitate the federal government's mis- or taxpayer advice to residential property own- sion, including providing for the needs of the ers. Similarly, the quid pro quo relationship federal work force. may be affected by a tax service size variable. Of course, the same argument can be made Thus, for example, one expert has reported that regarding groups of private local residents and in Prince George's County, MD -one of the tax business firms. In Honolulu or Miami, for ex- jurisdictions of the Washington, DC, metropol- ample, the tourist industry creates significant itan area-only a house priced at $85,000 or local public service costs. The same can be said more "pay(s) its way at the prevailing property of Boeing in Seattle or General Motors in tax and assessment rates."ll Generalizing from Lansing. Indeed, that is just the point-the this sort of relationship, it may be that, as a Waikiki hotels, Miami restaurants, and the class, residential property owners benefit dis- Boeing and G.M. manufacturing plants are not proportionately from local property tax- property tax exempt. Quite simply, there is an financed services. inequity here. One beneficiary of statellocal The critical point here is that even if real- government services-the U.S. establish- property tax collections are shown not to have ment-is receiving the services free because it a site congruence with the tax-financed ser- can mandate, and has mandated, a local tax exemption to itself. In general, other service ben- apply to rental arrangements and are entered eficiaries have no such mandating power and, into by the federal government primarily thus, if it is so determined under local admin- through the General Services Administration istrative procedures, will pay the property tax (GSA). For example, the Economy Act of 1972 or face a judicial proceeding and possibly a tax stipulates that rents paid cannot exceed 15% of sale. * the established fair market value of the rented The argument to eliminate the federal premises, nor can they exceed the appraised property tax exemption is quite straightfor- value of the rented building.12 Also, leases over ward. By acquiring real property, the govern- $2,000 must have an appraisal of the fair rental ment has assumed a responsibility borne by value for the premises. The value of alterations private taxable property owners. Thus, it to the rented premises cannot exceed 15% of should make payments in lieu of taxes on the first year's net rent andlor 25% of the much the same basis as owners of private prop- amount of the rent for special major improve- erty pay real estate taxes. Failure to treat the ments and alterations. All of these leases are federal government in this manner violates the updated as the leased properties are reap- horizontal equity canon of public finance, that praised (typically about every three years). In "equals be treated equally," with the index of practice, the base contract rent is usually estab- equality here being the value of the real prop- lished below the commercial rate for compara- erty that is owned. ble private space, and then a standard-level Leasehold vs. Ownership user charge (SLUC)-which can reflect the cost for maintenance and operation and security of In addition to the major structural inequities the rented property-is added to that base. The between the federally exempt and privately sum yields a general market rental rate. taxable owners of real properties discussed Thus, in its bid for rental space, the federal above, local governments must contend with government must agree to pay market rental another set of inequities created by the federal prices in order to assure the private owner(s) a presence. Specifically, the federal government fair rate of return on their property investment. has, over time, institutionalized certain inequi- These rental rates will reflect-and of course ties regarding property it owns and leases, include-the private owner's state and local thereby creating an even more confused situa- real estate taxes. The federal government's pay- tion of federal tax immunity. The problem ments on account of taxes here may not actual- arises because some federal activities are ly be by design, but de facto, they are just as carried out on property leased from the private important and variable as many of its other sector while others are conducted on federally payment programs that have been discussed. owned properties. A dichotomy in tax policy ACIR has estimated the real estate tax pay- exists because the federal government, through ments made by the federal government through its operations on leased property, pays local its rental payments by using information on an- real property taxes by way of its rental pay- nual rental costs and square feet leased by the ments. However, if the federal agency happens federal government each year, as contained in to be located on federally owned property, no the GSA Summary Report of Real Property real property tax is paid, even indirectly. In- Leased to the United States Throughout the deed, this situation is so arbitrary that the fed- World as of September 30, 1977. It has also ob- eral government's property tax bill would ap- tained information on property taxes actually pear to be an accidental by-product of the paid for commercial properties, as included in largely nontax decision to lease rather than the Building Owners and Managers Associa- own. tion (BOMA) annual report, Downtown and Numerous property management regulations Suburban Office Building Experience Ex- change Report. * The BOMA report contains ex- *The exception is, of course, the state government- mandated exemption from local real property taxa- *Although the commercial property is primarily office tion. Although these state and state-mandated exemp- space it also includes properties with retail stores, tions for some private institutions are every bit as storage, and special-purpose activities (such as clubs legitimate a concern as is the federal exemption, they and restaurants), which can be located in an office are not within the scope of this report. complex. pense and income data for a large national Total Downtown Suburban sample of office buildings and is widely recog- Land $ .30 $ .33 $ .17 nized as a reliable and, indeed, the only source Buildings 1.07 1.10 .92 of information in this property management area. * Total $1.37 $1.43 $1.09 The Experience Exchange Report does not The amount of property taxes paid on space report in as great a detail for government- the federal government was leasing can thus be owned buildings; national samples, as reported estimated by multiplying either of these sets of by GSA to BOMA, are listed as a total and dis- figures by the number of square feet leased by aggregated by downtown and suburban geo- the government in 1977. * However, the use of graphic regions only. The expense and income the private buildings' data would establish the data on government buildings are also more widest parameters of the imputed federal prop- limited, including only the operating and erty tax payments. Considering that maintenance costs and the vacancy and occu- 219,100,000 square feet and 1,633 acres of land pant rental space information. Nevertheless, in- (or an additional 71,133,480 square feet) were formation on private sector costs, such as aver- leased by the federal government at the end of age private property tax payments, can easily FY 77, depending upon the location of the be applied to the government data, where nec- leased property, property tax payments might essary, to fill these gaps. In computing these have ranged as follows: rental tax payments, data on both private and buildings were used. ~l9,lOO.OOO($1.38) = $302,358,000 (Weighted Average) Based on 1977 data in the BOMA report (the ( 1.46) = 319,886,000 (Downtown) ( ,936) = 205,077,600 (Suburban) most recent available), the average amount of property tax per square foot of private build- 71,133.480( ,311 = 22,051,379 (Weighted Average) ings is: ( .34) = 24,185,383 (Downtom) Total Downtown Suburban ( ,149) = 10,598,889 :SUburban) Land $ .31 $ .34 $.I49 This would yield respective totals of Buildings 1.07 1.12 .787 $344,971,383, were all the leased property in the central city area; $215,676,489, were all of it in Total $1.38 .$1.46 $.936 the suburban area; and an estimated Totals are the weighted average of downtown and $324,409,379, were it an average mix between suburban samples. Some totals may be rounded. downtown and suburban locations.13 A second estimate can also be computed The estimated average property tax per based upon BOMA documentation of the prop- square foot of government-owned buildings erty tax as a percentage of rental income from can be similarly derived by applying the per- privately owned buildings. The 1977 property centage of operating expenses attributable to taxes as a percentage of the 1977 rental income property taxes in private buildings to the corre- for buildings are computed as: sponding operating expenses that were listed Weighted for government buildings. The procedure Average Downtown Suburban yields: Land 3.56% 4.78% 2.34% Building 14.04 15.71 12.37

*It contains considerable detail in its statistical tables, Total 17.60% 20.49% 14.71% including: operational and maintenance expenses, construction expenses, fixed charges, other miscella- Thus, if the corresponding percentages are neous expenses, and rental incomes for each office taken from the 1977 total rental payments of building sample. Vacancy ratios, as well as average square feet per tenant and total building occupants, the federal government-$709,400,000-an- are also detailed. This information is presented for all other set of estimated property tax payments is buildings in the national sample, and is disaggregated derived: by downtown and suburban location, and geographic regions. The national samples are also separately detailed by certain building size, building age, story *The figures for private buildings should probably be height, andlor city size categories. The operating and used here, as government-leased space is privately income characteristics, including average property owned; however, the estimates for government build- taxes, are listed for each of these categories. ings are useful for comparison. (Downtown) $143,511,960 agency lessees. In this situation, a real estate (Suburban) 103,028,840 tax and operating cost escalator clause has (Weighted Average) 123,270,400 been used to cover some of the lessor's multi- Again, the estimated taxes paid through fed- year costs that are rising rapidly because of eral rent payments will vary according to the highly inflated and other inordinately high actual locations of the leased facilities. utility and operational costs. In fact, as df 1977, Another set of "pass-through" property-tax GSA adopted policies to include in its leases payments can be added to this total from the annual escalation clauses which provide for leases paid by the Federal Home Loan Bank both tax and operating costs. * Prior to that (FHLB). The taxes it pays on its leased build- time, the government had entered into one or ings (which are not documented by the bank) both of these provisions, depending upon the can be reasonably estimated as 20% of this The method for computing the rise in operating costs rental amount, based upon the downtown loca- varies from that employed with the taxes. The addition of all their facilities. Table 10 details these tional annual amount is determined by multiplying the total first year's estimated cost of the following estimates. items (if not provided by the government), as negoti- At least three additional types of rental ar- ated and established for the first lease year prior to rangements, which also facilitate federal pay- award of the lease contract: cleaning services supplies and materials; elevator maintenance; trash removal; ments of real estate taxes, are used in federal landscaping; water and sewer charges; heating; elec- leases. Unlike the rental "pass-through" pay- tricity; administration expenses for building engi- ments, however, these are actually charged neers andlor building managers, by the percentage of increase, if any, in the cost of living index over and against the federal lessees and included in above the cost of living index at the commencement of their leases by specially designed tax clauses. the lease term. Such increases in the cost of living in- The first type of rental clause was initiated to dex are measured by the U.S. Department of Labor's Revised Consumer Price lndex for Wage Earners and facilitate long-term, multiyear leases, which Clerical Workers (CPI-W), as published by the Bureau have become more popular with many federal of Labor Statistics of the U.S. DOL.

Table 10 ESTIMATED PROPERTY TAXES PAID THROUGH FEDERAL HOME LOAN BANK BUILDING LEASES AND (AMOUNT OF RENT), 1977-79 1977 1978 1979 Total $ 270,000 $ 264,500 $ 241,480 (1,350,000) (1,322,500) (1,207,400) Cincinnati * 62,280 58,080 45,820 ( 31 1,400) ( 290,400) ( 229,100) Indianapolis* 31,300 37,260 38,340 ( 156,500) ( 186,300) ( 191,700) Chicago* 74,440 58,840 49,540 ( 372,200) ( 294,200) ( 247,300) Des Moines* 41,160 45,840 41,400 ( 205,800) ( 229,200) ( 207,000) Topeka 7,120 9,660 9,660 ( 35,600) ( 48,300) ( 48,300) Seattle 31,840 31,400 32,000 ( 154,300) ( 157,000) ( 160,000) Little Rock 28,900 23,420 24,800 ( 114,500) ( 117,100) ( 124,000) 'These four banks had to divest part of their holdings, this tends to lower real property tax payments. SOURCE: AClR and Federal Home Loan Bank Board staff computations, 1979. rental market pressures in a particular jurisdic- and the last full tax years of the basic tion or region. lease term. This tax payment is made to the lessor as a 4. Tax Escalation Clause. This provision lump sum, the proportion of the tax increase generally requires annual adjustment of being based on the area occupied by the gov- the rental rate, as described earlier. ernment in the building relative to the total rental area in the building (the same as for Because the tax clauses in a lease can be pro- leased land). The clause also reserves to the tection for the lessor and lessee alike, a "zero" government the right to contest the amount of tax clause is generally viewed by USPS to be any valuation for general real estate taxes by the most useful in eliminating a lessor's incli- appropriate legal proceeding, either in the nation to pad bids or assessed values. USPS name of the government or in the name of the has developed regional tax and rental parame- lessor, or in both names. These reimbursements ters as well as appeals procedures for over- to the lessor for increases in real estate taxes assessment in response to such problems. * are limited by the Economy Act provisions Conversely, a tax clause providing for partial stated earlier; however, in the event of any de- or full tax compensation can obviously provide creases in the taxes (or operating costs), the to the private lessor some protection against in- government's rental amount would also be re- flationary assessments and tax rates. * * The duced accordingly. type of tax arrangment in use is thus evidence The U.S. Postal Service (USPS) has probably that the USPS-and the federal govern- made the most extensive use of real estate tax ment-leasing process may involve bilateral, clauses or riders in its rental leases over the negotiated considerations. past decade. As of mid-1979, the USPS leased The specific cost of GSA real estate tax approximately 28,000 buildings or building escalation clauses can be estimated from the areas, 5,000 of which had a tax clause in the aggregate budget figures reflecting both GSA lease.14 The exact form of the clause varies, tax and operating cost escalator clause pay- however, as USPS regulations allow "(a)ny ments. Based upon conservative-and incom- clause reflecting an arrangement as to taxes plete-estimates of the magnitude of each of which is most advantageous to the Postal Ser- these subtotals by GSA staff, some rough esti- vice in the particular circumstances (to) be in- mates of these tax payments were made. As- cluded in a lease solicitation or in a negotiated suming that one-fourth of the escalation lease contract."15 Thus, four alternative tax ar- clauses include both tax and escalation costs in rangements have evolved: one escalation figure, and, of the remaining three-fourths about 33% is attributable to in- Zero Tax Clause (or rider). Under this creases in taxes, a rough estimate of at least arrangement, the Postal Service pays all part of the amount paid on account of rising general real estate taxes applicable to taxes on leased property can be derived. These the leased premises. figures are presented in Table 11. Reimbursable Percentage Tax Clause. *See also the discussion in Chapter 3 regarding assess- Here, the Postal Service obligates itself ment appeals. Even simple administrative responsi- to reimburse the lessor for only a bilities that accompany tax escalation clauses may be specified percentage of any increase in avoided here if zero tax clauses are used. *The lessor's continued interest and participation in taxes. local proceedings on tax matters is desirable yet hard to maintain in this situation. The USPS Realty Acqui- 3. Adjustment of Rental Rates Under Re- sition and Management Handbook notes at least two newal Options. This type of tax arrange- cases where the tax clause is typically a preferable ment provides that the annual rental alternative to the zero tax clause arrangement: (1) leasing a new facility in an area where delayed com- rate for each renewal option period will mercial growth is anticipated with a potential in- be adjusted upward or downward, when crease in taxes to cover expanded public service to the the option is exercised, by an amount area; and (2) leasing a facility in an area where prior experience with this type of tax clause has proven representing the difference between more beneficial than the zero tax clause. USPS, Realty taxes paid by the lessor during the first Handbook, at 6-203.2. Table 1 1 ESTIMATED GSA REAL ESTATE TAX PAYMENTS THROUGH TAX ESCALATION CLAUSES IN LEASES, PARTIAL LISTING, 1978-80

Amount needed this year to an- nualize the cost of rental rates es- calators occurring in the previous year. $1 ,I 50,000 $1,875,000 $2,575,000 Half-year cost of rental rate es- calators occurring in this year. 2,750,000 3,000,000 3,500,000 Prior year liability (prior year claims, tax and/or operating clause es- calators which were not previously budgeted).* - 2,400,000 - Totals $3,225,000 $7,275,000 $6,750,000 'Refers to old negotiated fees, prior to new GSA policy, which provides that lessors can enter an amount for obligation (estimated) before making a firm rental agreement. These types of expenditures will probably not appear again because they are basically cleanups from prior years' arrangements. SOURCE: AClR staff computations.

A second type of federal leasing arrangement unfunded, projects. * Under this package ar- has become increasingly common in federal rangement, GSA makes semiannual payments government leases in the western states. It pro- to the contractors for interest, real estate taxes, vides for a tax rider on improvements made to and amortization of principal. At the end of the leased property by the lessee, and may be the contract period, which is usually 30 years, used in conjunction with one of the tax clauses title to the building vests with the government. described above. Under this arrangement, the An alternate "dual contract arrangement," with owner or lessor is relieved of the responsibility separate contracts for the construction and for real estate taxes based on the assessed value financing of building projects, is part of the of the property's improvements. Again, this purchase-contract agreement, and it also stipu- provision might be especially appropriate for lates that GSA pay the project's real estate Postal Sevice use as its leased facilities may taxes "to help ease the burden of the federal frequently require major alterations to accom- presence on the local community during the modate bulk mailing or other special purpose purchase-contract term."16 activities. Under this lease agreement, then, the The reasons for developing a federal build- additional tax liablity is passed through to the ing, tax payment program such as this are nu- government for specific renovations, altera- merous. Foremost among them, however, is tions, or new construction. that it is an expedient alternative to the present The third method of federal property tax pay- method of financing federal construction and ment included in federal leasing arrangements the Congressional delays in appropriating large is perhaps the most dramatic example of the major structural inequities between federally *The Public Buildings Purchase Contract Act of 1954 exempt and privately taxable owners of real (P.L. 83-519) and the Public Buildings Amendments properties. These payments are included as of 1972 (P.L. 92-313), contain the short-term, three- year authorizations for these agreements which, in the part of GSA's purchase-contract agreements for private real estate market, are also referred to as the construction of a backlog of approved, but "owner-leaseback" agreements. lump sums. For years, funds for construction gage liens, are likely to, or will, require that either through direct Congressional appropria- taxes be paid by the Postal Servi~e."'~Here tions or from the General Services Federal again, construction is being undertaken for Building Fund (a type of revolving fund, par- government use and to the government's speci- tially funded by receipts from GSA lessees and fications, for which the federal government has standard-level user charges) have not been suf- agreed to make the property tax payments. ficient to meet even the major federal building Thus, the question of whether or not the fed- plans. Moreover, in recent years, this disparity eral government pays local property taxes is a has only increased, giving rise to alternative function of the government's leasehold or own- construction financing techniques as well as ership decision. Moreover, the amount of rental increased use of leased space to meet the dra- activity in the federal government is rising: matically increased space demands from a In the last ten years, the federal govern- larger-than-ever federal government. The ment has increased its rented building growth in federal leasing will be discussed at area (square feet rented) by greater length below; for now, however, it is 50%-amounting to an annual rental in- important to note that both of these patterns crease of 134% for that period. have undoubtedly been in response to the cur- The comparable figures for a 20-year pe- rent federal government budget austerity. Rent- riod yield a 148% increase in leased floor al fees and lease-back payments are obviously area or a 542% increase in annual rental less noticeable in the federal budget than are paid from 1957-77. the large, and rapidly growing, up-front capital The trend toward increased federal rental costs associated with all types of construc- activity can be further illustrated by con- tion. * trasting the growth in floor area owned More relevant to the concerns of this ACIR by the federal government, which is only report, however, is the fact that current esti- 17.5% for the same 20-year period. mates of real estate taxes on the 43 buildings constructed under the "dual" method and the To be sure, acquisition costs of real property 23 buildings under the "single" method of owned by the federal government have in- purchase-contract through the year 2004 are creased substantially over this same peri- $1.3 billion.17 Rough calculations alone estab- od-169% for all federal property and 150% for lish these tax payments at an average of $43 buildings alone. Yet, the figures point to a million a year. clear trend of decisions to lease rather than Provisions similar to the purchase-contract own. Tables 12 through 17 document these agreements are also used by the USPS due to trends with data gathered from GSA records for the special purpose nature of most of its build- both military and civilian rental properties. ings. The specific guidelines, which the USPS Table 12. All Real Property Leased by the has set out in its realty acquisition and man- Federal Government in the U.S., agement handbook, state that tax clauses usual- 1957-77. ly need not be included when leasing a building of less than 2,000 square feet to be Table 13. Real Property Leased by the Fed- constructed for the Postal Service and leased eral Government for Civil Agen- for less than ten years-"except," the hand- cies in the U.S., 1957-77. book continues, "it may be more advantageous Table 14. Real Property Leased by the Fed- to include a tax clause in leasing such property eral Government for Defense Ac- in an area where lessors, as protection for mort- tivities in the U.S., Civilian Functions Only, 1957-77. *U.S. GAO, Costs and Budgetary Impact, op. cit. Be- cause they include interest payments, and real estate Table 15. Real Property Leased by the Fed- tax payments spread over what is essentially an amor- eral Government for Defense Ac- tization period, purchase-contracts do carry a higher financing cost than direct appropriation; yet at least tivities in the U.S., Military one analysis has suggested that the purchase-contract Functions, 1957-77. route is less expensive in the long term than is leasing a comparable facility. Table 16. Percentage Growth in Real Prop- erty Leased by the Federal Gov- In conclusion, the leasehold vs, purchase de- ernment in the U.S., in Five- cisions made by the federal government and Year Intervals, 1957-77. the resulting location of leased or owned federal facilities illustrate the federalllocal and Table 17. Table 16, at Ten-Year Intervals. publiclprivate inequities. The arbitrary deci- Several factors have contributed to this pat- sions to lease or own federal real property dis- tern, not the least of which are the rising capi- tort a jurisdiction's property tax base and result tal costs associated with all types of construc- in property tax payments that clearly are made tion in this country. Again, a primary without adherence to those principles of tax contributor is likely to be the current federal equity discussed throughout this report. government budget austerity, rental fees obvi- Federal Contracting (Procurement) ously being less in the short-term than the large initial capital costs required for federal Each year, as the result of various statutory construction. Moreover, the greater the fiscal requirements, executive orders, and circulars, stress at the federal level, the more likely it is the U.S. government solicits billions of dollars that federal facilities will be leased rather than in private sector contracts for the purchase and acquired. development of products and services. Thou- The GSA's Public Buildings Service (PBS) is sands of items (both of regular stock and spe- responsible for providing office space for fed- cial design) and services are acquired from the eral agencies across the country. Certain feder- private marketplace through "procurement" al agencies are also delegated authority to ob- expenditures. This procurement activity is tain (rent or purchase) their own facilities but justified for a variety of reasons. The reasons are to use GSA procedures in doing so. The range from a desire-expressed by a number of Federal Property Management Regulations Congressional committees, national study com- identify those agencies and the situations in missions, and administrations of both political which leasing exceptions are granted; they are parties-to implement a long-established goal typically limited to agricultural experiment of using the federal government as a consumer stations, military stations, and other special- to strengthen private enterprise, to attempts to purpose space. Authority is also generally del- use the government's budget as a tool to egated to agencies for building and leasing in achieve various social and economic goals. areas that are not in major urban centers. How- Through its contracting provisions the govern- ever, even in these situations, GSA is to have a ment can require suppliers to maintain fair em- supervisory role. Nevertheless, the Public ployment practices, provide safe and healthy Building Acts have mandated that GSA always working conditions, help handicapped persons survey the need for additional space or con- attain a more productive role in society, re- struction in an area prior to authorizing such quire industry to refrain from polluting the en- activity. For PBS, this process has involved re- vironment, and encourage small and minority- viewing all costs associated with owning and owned business.20 operating a building over time-i.e., a life cy- In 1979 the U.S. government spent $94.4 bil- cle cost analysis. lion on contract procurement-19.2% of total The GSA Life Cycle Planning and Budgeting federal outlays that year. * This is a particularly computer model, set up to assist PBS in this formidable amount, especially when combined life cycle planning decision, does not account with the billions spent on procurement-type for property taxes. However, a recent GAO re- grants to the private sector. port, which examined alternative methods of *Eight agencies account for $90.1 billion or 95.4% of financing federal building space acquisitions, the total: Department of Defense ($70.4 billion), De- has recommended that federal cost analyses in- partment of Energy ($5.8 billion), National Aeronau- tics and Space Administration ($3.9 billion), Tennes- clude real estate taxes "as an imputed cost of see Valley Authority ($3.5 billion), General Services government ownership under the rationale that Administration ($2.7 billion), Veterans Administra- other federal support may be required to com- tion ($1.6 billion), Department of the Interior ($1.2 billion), and Department of Transportation ($1.0billion). pensate the state andlor local governments for (Information provided by Robert Drake of the Federal real estate revenues lost."lg Procurement Data Center, Washington, DC.) Table 12 ALL REAL PROPERTY LEASED BY THE FEDERAL GOVERNMENT IN THE UNITED STATES, 1957-77

Building Floor Number of Acres of Land Area (in millions Annual Rental (in Year Leases (in thousands) of square feet) millions of dollars)

SOURCE: US. General Services Administration, Summary of Real Property Leased by the United States Throughout the World, published annually, Washington, DC, U.S. Government Printing Office, selected years. Table 13 REAL PROPERTY LEASED BY THE FEDERAL GOVERNMENT FOR CIVIL AGENCIES IN THE UNITED STATES, 1957-77

Building Floor Number of Acres of Land Area (in millions Annual Rental (in Year Leases (in thousands) of square feet) millions of dollars)

SOURCE: US. General Services Administration, Summary of Real Property Leased by the United States Throughout the World, published annually, Washington, DC, U.S. Government Printing Office, selected years. Table 14 REAL PROPERTY LEASED BY THE FEDERAL GOVERNMENT FOR DEFENSE ACTIVITIES IN THE UNITED STATES, CIVILIAN FUNCTIONS ONLY, 1957-77

Building Floor Number of Acres of Land Area (in millions Annual Rental (in Year Leases (in thousands) of square feet) millions of dollars)

SOURCE: U.S. General Services Administration, Summary of Real Property Leased by the United States Throughout the World, published annually, Washington, DC, U.S. Government Printing Office, selected years. Table 15 REAL PROPERTY LEASED BY THE FEDERAL GOVERNMENT FOR DEFENSE ACTIVITIES IN THE UNITED STATES, MILITARY FUNCTIONS, 1957-77

Building Floor Number of Acres of Land Area (in millions Annual Rental (in Year Leases (in thousands) of square feet) millions of dollars)

SOURCE: U.S. General Services Administration, Summary of Real Property Leased by the United States Throughout the World, published annually, Washington, DC, U.S. Government Printing Office, selected years. Table 16 PERCENTAGE GROWTH IN REAL PROPERTY LEASED BY THE FEDERAL GOVERNMENT IN THE UNITED STATES, IN FIVE-YEAR INTERVALS, 1957-77

Number of Acres of Building Annual Five-Year Intervals Leases Land Floor Area Rental

1957-62 Civil Agencies Defense: Military Functions Civil Functions 1963 -67 Civil Agencies Defense: Military Functions Civil Functions 1968-72 Civil Agencies Defense: Military Functions Civil Functions 1973 -77 Civil Agencies Defense: Military Functions Civil Functions

Reflects major increase between September 30, 1976 and September 30, 1977

SOURCE: U.S. General Services Administration, Summary of Real Property Leased by the United States Throughout the World, published annually, Washington, DC, U.S. Government Printing Office, selected years. Table 17 * PERCENTAGE GROWTH IN REAL PROPERTY LEASED BY THE FEDERAL GOVERNMENT IN THE UNITED STATES, SELECTED PERIODS, 1957-77

Number of Acres of Building Annual Selected Periods Leases Land Floor Area Rental

1957-67 Civil Agencies Defense: Military Functions Civil Functions 1968 -77 Civil Agencies Defense: Military Functions Civil Functions

1957-77 Civil Agencies Defense: Military Functions Civil Functions

SOURCE: U.S. General Services Administration, Summary of Real Property Leased by the United States Throughout the World, published annually, Washington, DC, U.S. Government Printing Office, selected years. Although the federal government procure- of the institutional geographic location de- ment process includes legal, procedural, and cision: because a PILOT would mean that sim- social program requirements not generally ap- ilarly valued properties in different taxing ju- plicable to other customers, the basic process is risdictions would pay different amounts in lieu the same as that for any contracting arrange- of tax payments (perhaps quite different, if ment agreed upon between two parties, viz, a some communities offered to continue the ex- dollar sum is set and a production service de- emption to the federal government), is there a livery is required. If, as is usually the case, the concern that if the federal government were to contract is with a private taxable firm, the firm minimize costs, it might become "foot- will allocate the government payment to the loose"-i.e., searching as some private busi- usual costs of production (wages, rents, inter- nesses (taxable and exempt) now do, for low est, and profits), including taxes. As a result, tax (PILOT) jurisdictions? the federal government is indirectly paying Keeping these caveats in mind (they will be real property taxes as a cost that will certainly addressed below), a strong argument can be be included, either explicitly or implicitly, in a made that, from an efficiencylneutrality view- firm's "overhead" cost component of the con- point, the federal government's tax exempt sta- tract arrangement. The more the federal gov- tus tends to have the following three nonneu- ernment uses private contracting-procurement tral implications: in fulfilling its mission, the more the local 1. The tax exemption encourages utilization property tax and economic base benefits. of real property owned by the government. Be- Alternatively, of course, as federal procure- cause the government is relieved of paying tax ment gives way to "in-house" production (as on the real properties it owns, it will under- appears to be the case since 1972), these real estimate the opportunity costs of real property property tax contributions decline according- it utilizes in performing its functions. More- ly. * Thus an inequity somewhat similar to the over, the degree of this underestimation will lease vs. ownership issue discussed above, is increase proportionally as the amount and created here. One way to alleviate this inequity value of the property held increase. Consider, would be to attach a real property tax contribu- for example, the federal government's decision tion to the "in-house" work through the PILOT regarding its space requirements, which is im- system. plicit in determining whether or not to hold large tracts of underutilized properties, per- Eff iciency1Neutrality haps in the form of office facilities in prime metropolitan or metropolitan fringe areas; or, a In public finance, fiscal efficiency or neutral- not uncommon example, the holding of valua- ity requires that the tax system be designed to ble shoreline or other recreation land. There is accomplish certain intended policy objectives, an "opportunity" cost to this property-i.e., a but that beyond this it should minimize inter- value of that property measured against its ference with other economic activities. Ex- highest and best alternative use-a very real tending this concept from private economic de- cost which must be taken into account in order cisions (the context in which it is usually to determine its best or most efficient use. applied) to collective decisions regarding a However, because the government is not in the PILOT is a complex task requiring careful in- business of maximizing financial returns, it terpretation. One obvious distinction that must does not have to consider these additional be kept in mind is that a federal agency has a costs. If it were, it would be forced to take into different concept of cost-minimization behav- account society's alternative uses for its hold- ior than does an individual or a manager of a ings. The only way to provide the government private institution. Another distinguishing fea- with any meaningful economic signal regard- ture involves a question relating to the nature ing the valuation of its holdings is to do what is done with most private property-value it *The Commission on Government Procurement re- and tax it (i.e., levy a payment in lieu of taxes). ported that in fiscal 1972 procurement represented 24.3% of federal outlays. See Report, op. cit., Vol. 1, Although this only provides one "signal," that p. 3. is one more than the government receives now. Giving the federal establishment this infor- outside as well as within the govern- mation does not mean that the government will ment-constituencies which, in the world of abandon its "mission" or even reduce its deliv- bureaucracy, can be used to justify a given pro- ery of services made from that property. In or- gram's continued existence and growth. In- der to minimize its holding costs, however, it deed, if a PILOT came directly out of each may lease or sell some of that land, perhaps agency or office budget (or were even com- even for purposes of future private develop- puted as a shadow price by a central disbursing ment.21 office), there would be an incentive for officials Alternatively, the federal government may to improve the efficiency of their property use simply become more efficient in its own land in order to minimize the PILOT, and thereby use by employing that property more inten- free funds for agency programs. * If the pay- sively and, in the process, disposing of (or not ments in lieu of taxes were paid directly out of acquiring) other properties. Of course, in some general Treasury funds, rather than on an cases there would be no change in the nature of agency-by-agency or office-by-office basis, the property utilization, either because the gov- there might still be an incentive to minimize ernment is already using its facilities with the them-particularly in a period of budget re- appropriate intensity or because the economic straint, as part of an overall Congressional at- "signal" given by a payment in lieu of taxes tempt to hold down costs on an item (PILOT) would not be large enough. Indeed, the single that is not perceived to be part of the govern- most important argument against reliance on ment's service "mission." Aside from these ex- the PILOT as an opportunity cost signal is that amples, however, there is really no other prac- the PILOT amount may not be enough to in- tical political incentive to making a payment in duce an agency to reevaluate its property uses. lieu of taxes. It is worth noting, for example, that even pri- Would the payments in lieu of taxes induce vate business firms, which are profit the U.S. government to become footloose in its maximizers, tend to base real property use and location search? If it takes its cost minimiza- location decisions on the basis of nontax deter- tion seriously, there could be situations where minants. What is critical here is the govern- this might have some bearing. The U.S. Postal ment's objective: if it is merely cost minimiza- Service, for example, usually considers real tion in the absence of the profit motive, the tax property tax levels along with total rent re- factor grows in its importance in the land use quirements when it leases a private building decision. * for an operation such as a bulk mail distribu- Finally, mention should be made of the fact tion center, requiring a large amount of floor that the force of this opportunity cost argument area, usually on one level, but not necessarily is weakened to the extent that federal agencies in a heavily populated area. However, there are simply do not care about keeping costs down. at least two important reasons for believing Certainly, when one observes agencies rushing that the federal government will not make a lo- to spend their appropriations at the end of each cation decision on PILOT grounds. Both have fiscal year in order to at least maintain their been noted above in different contexts, and share of the total government budget, there is thus only need be mentioned briefly here. reason for concern here. On the other hand, The first is that the difference in PILOT lev- government agencies, or the officials who run els between jurisdictions will probably not be them, frequently do have as an objective large enought to have much, if any, influence increasing their services to their constituents on the location decision-even if we assume and of maintaining or even increasing their that the federal government becomes a cost- employment levels. Both these objectives have minimizer par excellence. As is true for private the effect of building political constituencies businesses which tend to minimize or ignore That is, the risk taking factor which is inherent in the private profit-making decision process outweighs the When the establishment of the Federal Buildings disincentive effect of property tax differentials. Ac- Fund was being considered, GSA anticipated there cordingly, since the profit objective is not applicable would be "more efficient and economical use of space to the public sector, the public sector location deci- if agencies had to budget and pay for it." General Ac- sion may merely be a cost-minimization decision in counting Office, Costs and Budgetary Impact, op. cit., the absence of a profit motive. p. 3. all statellocal taxes (not just real property ACIR's empirical evidence on the signifi- taxes) in their location decision, other factors cance of this land value distortion hypothesis play a much larger role. These factors include is mixed. As is shown in Table 7, when the me- access to the consuming public and the work dian value of owner-occupied homes is used as force, space availability, and proximity to other a proxy for the land value changes, there is agencies.22 some support for this hypothesis in the random Second, the U.S. government's location deci- sample of 40 cities. As the data indicate, there sion must, by law, be heavily influenced by the is a negative and statistically significant rela- Presidential policy guidelines. Thus, the GSA tionship between the value of federal tax ex- has recently issued regulations, pursuant to Ex- empt property and home values. However, the ecutive Order No. 12072 of August 1978, which table also shows that there is no such signifi- require that federal agencies give primary con- cant relationship for the 45 largest cities. What sideration to locating their activities in central this suggests, in conjunction with the smaller business areas. Special priority is to be di- city finding, is that there may be some thresh- rected to distressed downtown areas. old factor at play here-i.e., that large cities, 2. The exemption gives the government a although having a large absolute dollar tax loss competitive edge in bidding for property and at due to the federal tax exemption, are not as the same time distorts land prices. Assuming a heavily impacted in relative dollar terms as are given set of state and local government services smaller jurisdictions and thus do not reach a and that local taxes are capitalized into prices level at which the federal exemption becomes of real property, cet. par., the tax exempt status significant. of the federal establishment allows it to offer a Another reason the evidence is mixed is that higher price for a given parcel of property than the Table 7 data also show that, for both sets of can its nonexempt competitor. In addition to city samples, the relationship between the this competitive disadvantage, the private tax- amount of nontaxable federal property and per payer may find that the land he does own will capita real property tax burdens is not statisti- decline in value from what it otherwise would cally significant-a finding that cannot be cited have as more of the tax jurisdiction's land goes as support for the depressed land value argu- to tax exempt uses. This apparent paradox can ment. Whether there are other reasons for the arise if, as a result of the erosion of the real federal government's relationship to depressed property tax base within municipal boundaries, land prices is conjectural, although one might effective tax rates are increased in order to expect such a phenomenon if the federal prop- maintain the flow of public services. These in- erty were providing a "negative service" such creased taxes, when capitalized, will reduce as a penitentiary or an influx of commuters the remaining property's value. This occurs be- who were failing to "pay their way" for the cause the portion of the property tax levied on costs they create.24For now, it is best to recog- land, which is in fixed supply, cannot be nize that the land value distortion probably is shifted forward in the form of higher land significant for some cities, but that the phe- prices. Thus, the burden of this increase in the nomenon may be offset by other factors, such property tax falls on the landholder. as the ability to use nonproperty tax revenues The likelihood of this occurring will vary or the agglomeration economy that may be cre- among local jurisdictions according to their ated around the federal property itself. ability to use nonproperty taxes or their will- 3. The exemption may increase central city- ingness to reduce the scope and quality of pub- metropolitan fiscal disparities. This argument lic services in order to hold down tax burdens. is predicated on acceptance of the land value Thus, individual and commercial residents of a effects discussed immediately above. More- municipality that must rely heaviliy on the real over, for this phenomenon to occur, two property tax (as most do) and which, for events, both plausible, came about. The first is various locational and institutional reasons, at- full compliance with the GSA regulations to tracts a great deal of tax exempt activities (fed- implement Executive Order No. 12072, requir- eral plus private), are most likely to experience ing federal agencies to locate in city areas this land value di~tortion.~~ whenever possible. If GSA has the will to enforce its regulations, such locational effects public functions should not only be viewed as may The second is a reduction in the predominantly local, but that such functions amount of federally leased real property, lead- can best be implemented at that level. These ing to a larger amount of federally owned facil- activities include routine police control and in- ities in central areas per E.O. 12072. In fact, vestigation, traffic control, fire protection, one of the main proposals of a recent Senate street and sidewalk maintenance, refuse collec- bill was to establish a long-run goal to place no tion, water and sewer mains, recreation cen- more than 20% of federal workers in leased ters, small libraries, elementary and secondary buildings. The bill, S. 2080, and its companion education, zoning, sanitation, and public hous- House bill, H.R. 6075, died in a conference ing management. committee of the lame-duck 96th Congress in This long list is overwhelmingly financed by December 1980. Taken together, these events the property tax, a levy which accounted for could provide the very kind of effect needed to 80% of local taxes in 1978. * Moreover, it is rea- flip those same statistical relationships in Ta- sonable to assert that, acting in their best inter- ble 7 to significance for the large as well as the ests, state and, especially, federal government smaller city. Moreover, there is ample evidence officials are better off if they leave as much as to indicate that the other side of this disparities possible of the financing-and the manage- equation-suburban growth and rising as- ment that inevitably follows that financing sessed property values relative to the metropol- control-of these peculiarly local functions to itan core-is already occurring. the local officials. Does this mean that current federal policy is Clearly, one way to accomplish this is to inconsistent, in that its very attempt to revital- help local governments maintain their own ize the cities can, if it works, tend to depress sources of revenues. But that task is becoming land prices? Yes, this is quite possible. The one increasingly difficult as muncipalities face rate simple way to minimize this inconsistency and levy limits (largely imposed by the states) would be to eliminate the property tax base on their property tax raising capacities, and tax erosion effect with payments in lieu of revolts continue to come in forms ranging from taxes-a program which may become quite im- continued erosion of the residential property portant to some cities should such an extreme tax base through homeowner preferences to proposal as the above-mentioned section of S. local voter rejection of school bond issues. 2080 be enacted. * Table 18 indicates the extent of the resulting centralization of government financing from a Revenue Productivity: Strengthening state-local perspective. In the past ten years Fiscal Federalism alone, the relative dependency of local govern- The case for a financially strong local gov- ment on higher level of governments (not ernment sector as a necessary ingredient for including the state takeover of once local func- maintaining a viable system of fiscal federal- tions) has increased by more than one-third. ism has been discussed adequately elsewhere. Arguments for maintaining some local fiscal autonomy do not derive from an inherent bias *ACIR, Significant Features of Fiscal Federalism, against higher levels of governments, but are 1978-79, M-115, Washington, DC, U.S. Government Printing Office, 1979, Table 28. Local nonproperty based simply on the recognition that there is a taxes are, however, increasing in importance, espe- framework for designing a system whereby cially for cities. In 1977 local nonproperty taxes ac- public sector functions are allocated among the counted for $14.5 billion, or 19.4%, of local tax revenue. Local sales taxes provided 7.2%; local income federal, state, and local units. Although there taxes, 5.0%; and all other nonproperty taxes-such inevitably will be an overlapping and sharing as license fees and selective sales and gross receipts of some functions by two (or all three) levels of taxes on utilities, motor fuel, alcohol, and to- bacco-7.2%. While these percentages are low rela- government, ACIR research shows that some tive to the property tax, their importance is increasing. The relative contribution of local nonproperty * No comment is intended at this time on other provi- tax revenues to total local tax revenues was 15.4% in sions of S.2080-just a strong indication that a pay- 1971-72 and 13.4% in 1966-67. For a discussion see ments in lieu of taxes program is a reasonable corol- Steven David Gold, Property Tax Relief, Lexington, lary to it. MA, D.C. Heath and Co., 1979, Chapter 10. Table 18 STATE-LOCAL INTERGOVERNMENTAL REVENUE, BY AMOUNT AND IN RELATION TO GENERAL REVENUE FROM OWN SOURCES, FOR LEVEL AND TYPE OF GOVERNMENT, SELECTED YEARS, 1955-79

Local Government Intergovernmental Revenue .From- State Inter- governmental All Governments-Federal, Rovenw from- Federal Government (direct) State Governments1 State and Interlocal

Federal Local All Local All Local All Local Fiscal Govern- Govern- Govern- Munici- School Govern- Munici- School Govern- Munici- School Year ment ments mentsz palities Counties Districts ments2 palities Counties Districts ments2J palities Counties Districts -. Intergovernmental Revenue (in millions of dollars) 1955 $ 368 $ 121 $ 31 $ 169 $ 5.987 $ 1.236 $ 1.767 $ 2.720 $ 6.355 $ 1.439 $ 1.837 $ 3.031 19604 592 256 45 225 91522 11868 2,245 4;850 1011 14 1965' 1,155 557 98 331 14,010 2,745 3,325 6,865 15,165 1970' 2,605 1,337 234 535 26,920 6,173 7,000 12,895 29,525 1971 ' 3,391 1,861 302 700 31,081 7,401 8,145 14,730 34,473 1972 4,551 2,538 405 749 35,143 8,434 9,252 16,471 39,694 1973 7,903 4,370 1,075 790 39,963 9,694 10,262 17,995 47,866 1974 10,199 5,458 2,331 829 44,553 10,464 10,890 21,720 54,752 1975 10,906 5,844 2,385 871 51,068 13,052 11,842 24,209 61,974 1976 13,576 7,442 2,911 894 56,169 13,772 13,156 27,181 69,746 I 977 16,637 8,880 3,741 934 60,311 14,236 14,315 29,660 76,948 1978 19.393 10,234 4,824 1,229 64,661 14,492 15,389 33,631 84,054 197F 19,640 10,080 5,010 1,285 70,750 15,160 18,240 36,500 90,390 Intergovernmental Revenue as a Percentage of General Revenue from Own Sources 1955 2.5 1.9 1.1 4.3 40.6 19.4 59.9 69.0 43.1 1960' 2.6 2.8 1.O 3.2 41.6 20.1 52.2 69.3 44.1 1965' 3.6 4.5 1.6 3.1 43.3 22.2 53.7 64.8 46.9 1 9704 5.1 7.1 2.3 3.1 52.4 33.0 67.4 75.1 57.5 1971 ' 5.9 8.9 2.6 3.7 54.1 35.4 69.0 77.4 60.0 1972 7.1 10.8 3.0 3.6 54.5 35.9 68.1 79.3 61.6 1973 11.2 17.0 7.1 3.5 56.7 37.7 67.9 80.2 67.9 1 974 13.3 19.8 14.2 3.4 58.1 38.0 66.2 88.6 71.3 1975 12.9 19.3 13.1 3.2 60.5 43.2 65.3 90.3 73.5 1976 14.6 22.5 14.4 3.0 60.3 41.6 64.9 91.5 74.8 1977 16.3 24.2 16.5 3.0 59.1 38.7 63.2 94.4 75.4 1978 17.5 25.8 19.2 3.7 58.4 36.5 61.1 97.0 75.9 1979' 17.0 24.0 19.4 3.7 61.1 36.1 70.6 105.5 78.0 ' Includes indirect federal aid passed through the states. In 1979 such aid was estimated to be approximately $16 billion. 21ncludes townships and special districts. =Duplicative intergovernmental transfers are excluded. 4Partially estimated. SOURCE: ACIR, Significant Features of Fiscal Federalism, A-123, Table 108, p. 165. The states have fared much better, increasing intergovernmental system. As an accountabil- their relative dependence by less than half that ity device, the PILOT would provide not only a percentage. means of disclosing to the taxpaying public If local governments could simply shore up what its tax burden is (or would be) in the ab- their own-source fiscal position by using non- sence of a tax exemption; it would eliminate, at property tax revenues, this growth in intergov- no political threat to the viability of the U.S. ernmental dependency would not be so great. government, a federally mandated state-local to But with a very few exceptions, they cannot do federal subsidy. Moreover, because this subsi- so. As a rule, localities must stay with the dy is hidden-i.e., it does not receive the peri- property tax if they are to maintain fiscal au- odic budget review given other types of direct tonomy. As was discussed above, their "open" subsidies or expenditures-it violates princi- economy character requires that local govern- ples of sound public administration. ments must rely heavily on the real property Does the fact that the federal government, as tax base-the base which, for all practical pur- a "taxpaying" institution, fails to have a col- poses, is physically immovable, and thus the lective vote on setting local tax rates and ex- only readily accessible one. penditure priorities similarly imply that One implication of this fiscal arrangement, statellocal government will not be held ac- which is beyond the control of the local gov- countable for its use of payments in lieu of ernment, is that efforts need to be made by all taxes receipts? Such a situation might well governmental levels to maintain the strength of exist in some cases. For example, if the bulk of the property tax as the mainstay of the local federal workers were nonresident commuters, revenue system. Although it would be quite in- the federal government might argue that they correct to claim that the enactment of a tax are not represented adequately in local legisla- equivalency payments in lieu of taxes program tive councils. The same, of course, can be said is going to "save" the property tax, it will have of nonresident owners and factor suppliers of some importance in the aggregate-as it will, if local business firms. However, in reality, when fully implemented at the subnational level, in- the government-even as an institutional crease local property tax collections by 5% to entity quite apart from its employees and con- 6%. For some conlmunities the contribution to sumers of its services-accepts the responsibil- revenues will clearly be above that mark; for ities of a property owner, it also becomes the hundreds of others, of course, there will be no recipient of various well-established political gain. Overall, however, a PILOT will strength- and legal avenues through which to make its en the local property tax. institutional views known. Moreover, if a local Finally, it should be noted that, to the extent government is shown to be unaccountable in a PILOT does strengthen the local property tax, its use of public money, the federal govern- it will contribute to the community's ability to ment still has a unique final political resource: secure bond financing, as taxable assessed it can refuse to make the payments in lieu of value is an important factor for determining a taxes and avoid any of the penalities which, if municipality's credit rating. it were a private taxpayer, would certainly be levied. Fiscal Accountability An underlying principle of the payments in ALTERNATIVE FORMS OF A lieu of taxes program is that, by acquiring land, PAYMENTS IN LIEU OF TAXES buildings, and structures and facilities, the fed- SYSTEM eral government has tacitly assumed a responsibility borne by private property owners, and The full tax equivalency method is not the thus it should make payments in lieu of taxes only approach to consider in determining the on much the same basis that owners of private payments in lieu of taxes base. Rather, there are property pay real estate taxes. This concept is two broad types of alternatives. First, tax not only consistent with the foregoing justifi- equivalency could be modified from a "full" to cations; it has the additional merit of adding to a "partial" approach. This latter path would be the fiscal accountability characteristics of the adopted if the full tax equivalency base were eroded for various reasons of fiscal and totally excluded. In public finance jargon, a adminstrative expediency. The second alterna- "notch" problem has been created, and the tive is to reject tax equivalency altogether and principle of horizontal equity-"equal treat- adopt an entirely new form of payments base ment of equalsH-is violated. computation by focusing on approaches, such Finally, although there will be some admin- as actual cost reimbursement for the state and istrative benefits to the federal government local public services received or the net bene- from a threshold (if it were set high enough, of fits created by the federal government. The re- course, no payment would be made), as such mainder of this chapter addresses each of these "strings" start to be attached, compliance costs issues. increase for the local government-enough so, perhaps, to actually deny the payments in lieu Partial Tax Equivalency of taxes to communities which theoretically should qualify. This conclusion follows from THRESHOLD the research quoted earlier in this report-that When the Canadian federal government initi- the reason federal grant payments often do not ated its tax equivalency payments in lieu of reach many smaller cities for which they are taxes in 1951, the program included an eligi- intended is the complexity in applying for bility threshold so that payments were limited them.27 Interestingly, however, it should be to municipalities where the value of federal noted that the small cities with inadequate property exceeded 4% of the combined value of "grantsmanship" would not, as a class, be the taxable and federal property.26At that time, 4% biggest losers under a threshold approach. As was thought to be the average ratio of federal the data in Table 7-on the relationship be- property value to total (private plus federal) tween federal property value and owner- value. This eligibility threshold was lowered to occupied home values-suggest, the ratio of 2% when the Payments in Lieu of Taxes Act federal real property values to total value may was amended in 1955, and removed altogether be lower for large cities than for all cities. The in 1957. fact is, that, without a jurisdiction-by- Presumably, the purpose of such a threshold jurisdiction analysis for all local governments is either to minimize the cost of the payments in the U.S., one is unable to tell who will be in lieu of taxes to the federal government or to the largest losers under a threshold ap- eliminate a certain set of small PILOT recipi- proach-a fact, of course, that serves to further ents for administrative ease. A threshold would emphasize the arbitrary nature of such a pro- accomplish both of these objectives. An imme- posal. diate major problem arises, however, because If, after considering these arguments, "prac- there is no a priori way to determine the tical" considerations still dictate some sort of "proper" threshold level. Should it be set at plan to minimize the cost of the payments in some aggregate average figure as in Canada's lieu of taxes to the federal government, while initial program? If so, the U.S. amount would at the same time recognizing the principle that also be about 5.Z0/0. But why not 2.6% or some payments in lieu of taxes should be 10.4%? Surely these could be "justified" on made, then the solution would seem to be sim- grounds of fiscal andlor administrative expedi- ply to fund the program at some amount less ency. than 100% of the $3.65 billion and reduce the In addition to the arbitrary nature of the payments to all governments accordingly. If, threshold approach, it also has serious equity however, the rationale is to reduce U.S. com- and administrative defects. The equity viola- pliance costs by eliminating a large grouping tion is straightforward: if communities "A" of potential PILOT recipients, the threshold is and "B" each have $X thousand of assessed an appropriate tool. value of federal real property, but for "A" that A CEILING amount happens to just exceed the threshold, whereas for "B" the amount falls just below it, Many large federal installations are situated then "A" receives a payments in lieu of taxes in sparsely populated areas with little privately based on its entire federal property but "B" is owned taxable property and limited needs for government services. Accordingly, the ques- ferent policy twist. What it does not address, tion arises as to whether in such cases some however, are the other arguments for PILOT ceiling should be included in a payments in applied to all properties. Indeed, a cutoff date lieu of taxes program as an "antiwindfall" pro- would reject most of the equity concerns noted vision.28 above, as well as undercut the attempt to The idea has some merit, as it is probably strengthen the local tax base. In addition, the just as wise politically to avoid creating an ex- idea of a cutoff date raises a fundamental type treme class of winners as it would be to create of "home rule" issue. If one accepts the argu- a class of losers. Again, however, one is faced ment that all inequities are capitalized over with the arbitrary nature of any ceiling: time, does that mean that any tax "reform" is, quantitatively where does a windfall begin to therefore, inequitable because it always be- occur? In addition, this approach implicitly as- stows some windfall? Probably so. Thus, this sumes a static fiscal relationship between the argument is very much embodied in the "old local and federal governments. Is a windfall tax is a good tax" principle. Nevertheless, the scenario really so likely and threatening as it concern is sufficiently narrow, and the current seems initially? If a federal agency is so very inequities sufficiently large, to reject the cutoff large relative to its surrounding area, then it argument as a policy guideline. seems that one solution-which is equally as plausible as letting the windfall occur-would Alternative Tax Bases be for officials of that agency, even if they are from Washington rather than residents of the This report has consistently focused on the local area, to "lobby" just as any business has tax equivalency form of a payments in lieu of to do in a similar situation to reduce the rate applied to the base. This solution would avoid taxes program, a decision which, as will become clear, was made on conceptual as well as the threat of a windfall and, just as important, on practical and methodological grounds. Ob- would avoid creating the attendant equity and viously, the form of the PILOT base has direct efficiency distortions of an arbitrarily deter- implications for the cost of the program: mined ceiling. designating a particular PILOT base measure- A CUTOFF DATE ment approach as the most appropriate one for computing a payment also determines the level In the only previous comprehensive study of of the payment. Accordingly, a review and a broad-based payments in lieu of taxes pro- valuation of alternative ways to measure the gram, the Bureau of the Budget (1951) sub- payments in lieu of taxes base is appropriate. mitted a plan to the Truman Administration Four such alternatives are examined below. that would have made ineligible for inclusion in the payments in lieu of taxes base any prop- COST-OF-SERVICES3' erty acquired or constructed prior to January 1, The narrowest prescription for determining 1946-i.e., wartime (WW 11) proper tie^.^^ The the level of payments in lieu of taxes is the argument for a cutoff date reflected the pre- cost-of-services approach. In its strictest formu- sumption that adjustments for the exempt sta- lation, this approach would require the federal tus of older federal properties have been made government to compensate the local jurisdic- through the process of tax capitalization. To tion for the actual costs of all services provided make payments on account of federal proper- directly to the federal properties (e.g., fire and ties acquired before some reasonably recent police protection and sanitation). Accordingly, date would bestow windfalls on many present the approach requires the local jurisdiction to owners of taxable property who purchased estimate the cost of such services. There are, their properties at prices that already reflected however, three limitations to this approach. local tax readjustments necessitated by federal The first is directly concerned with the estima- removal of other properties from the tax tion requirements; the second and third are of a The argument is an elegant one and is based conceptual nature. on the same principles discussed above in re- First, the costs should represent only incre- gard to efficiency, albeit with a somewhat dif- mental, or marginal, costs incurred in providing services to the federal government. That is, such crucial factors as other tax revenues fore- the federal government should only compen- gone because of the federal presence or the sate the state or local government for costs increase in local spending that results from incurred above and beyond the total costs of Congressional mandating of statellocal expen- providing the services to residents. To the ex- ditures (requiring certain service levels or ser- tent that goods provided by the local govern- vice quality without providing funding). ment exhibit the characteristics of "pure" public goods-goods consumed jointly or ADJUSTING FOR FEDERAL OWN-SERVICES collectively-it is difficult to distinguish the federal from the nonfederal component of de- In any political debate regarding the choice mand, i.e., the free rider problem. Theoretical- of a PILOT base, one point is likely to be raised ly, if all goods were "pure" public goods, the against full tax equivalency: that some federal marginal cost of extending any service to the agencies provide state and local government- federal government would be zero. type services for their own personnel and prop- A conceptual problem, related to the first, is erty and thus do not place as large a fiscal im- how to evaluate the cost of services provided pact on statellocal services as do private directly by the local government. The marginal individuals or institutions. The strongest case cost should, by definition, be the difference be- for this argument is illustrated by the military tween total expenditures on a particular ser- facility with has its own police, fire, judiciary, vice when it is extended to the federal govern- sanitation, and on-base transportation services. ment and when the federal share is excluded A corollary to this is that education-the most from the amount supplied. For two reasons, it significant direct service not provided by the should not be the average cost multiplied by federal facility-does receive some federal as- the level of service provided to the federal gov- sistance under the education impact grants ad- ernment. First, average cost data include fixed ministered by the Department of Education. costs which are spread evenly over all units This argument has merit. But at the same produced. If the additional output going to the time, it has enough flaws to warrant its rejec- federal government does not require additional tion as a policy guide: capacity, the change in total cost is not related The most fundamental flaw is that there to the existing fixed costs but rather is limited is no guideline for determining whether, to increases in variable costs. On the other for example, a military police force or a hand, if the additional output for the local gov- member of the Federal Protective Service ernment requires additional capacity-a very (an in-house security force for civil significant cost element for some jurisdic- buildings) is supplementing or sup- tions *-the total cost of such additional capac- planting similar statellocal services. ity should be included and not spread over all Clearly, both of these elements exist. previously produced units. Second, as the When there is a disturbance in a ship- quantity of a certain public good supplied in- yard, the military police or even the FBI creases (with the addition of services to the may be called in. However, whenever federal government), the average cost of pro- there is a disturbance outside the base, duction may fall, rise, or remain unchanged de- or, as is generally true, inside or outside pending on the cost conditions associated with any federal civil operation, the state or the current level of production. local police are required. Where is the A third criticism of this approach is that it supplementing-supplanting line drawn? provides an inherently myopic view of the fis- Even if there is some supplanting of local cal impact of the federal presence: it ignores services, many private taxpayers (usually commercial) provide the same sort of *Unpublished remarks on PILOT by Portsmouth, VA, Mayor Richard J. Davis, Senate Rules Committee, services for their personnel and proper- Virginia General Assembly, January 17, 1979. Mayor ties. Rather than rely on federal or local Davis notes that the most expensive of all the cost of police, they hire store police or private services to the local community due to Norfolk Naval Shipyard is the "construction of highways to accom- security agencies. The clearest case to modate morning and evening peak traffic loads." "prove" supplanting would occur if the local government refused to service fed- effort to keep the federal installation-even eral facilities, thus forcing the U.S, to though conversion to private uses might have supply those services to itself. Certainly, more beneficial economic effects in the long if such a situation were to arise (even if run. by mutual agreement of the U.S. and In the context of determining a payments in state or local government), then a pay- lieu of taxes base, this benefit issue is used as a ments in lieu of taxes discount might be justification for providing a payment at an warranted. However, it is important to amount less than full tax equivalency. The ar- note also that private businesses in many gument herein is that, because the federal pres- cities must supply their own trash collec- ence creates benefits, some downward adjust- tion or even infrastructure improvement ment needs to be made in the "full tax" services (e.g., curbing, sewer hookups). approach. This approach usually takes one of The argument ignores the practical fact three variants: that tax receipts finance much Local vs. Nonlocal Burden. On the gener- more than direct services. If the property al presumption that local tax costs of tax were designed to cover only direct property devoted to activities that are of service costs which accrue to a given a predominantly national interest (e.g., property owner, the entire tax base defense bases, national or regional office would be narrowed substantially for the operations) should be borne largely by PILOT as well as for private taxpayers. federal taxpayers, and that local tax costs The very real and practical methodolog- of activities that are chiefly of local inter- ical and conceptual problems with cost- est and benefit (e.g., post offices, weather of-service measurement are yet to be stations, and land offices) should be solved. Yet this discounting approach borne by the community, it is deemed presumes that it can be done. necessary to have a class-by-class review of which properties should be excluded NET BENEFITS (BENEFIT-COST) from a payments in lieu of taxes base. In essence, this argument is an extension of So far, much has been said in this report the usual criteria a state or city legisla- about the economic costs that the federal pres- tive body may consider in determining ence creates for a community. It is also quite which private institutions qualify for true, however, that acquisition and use of prop- local tax exemption. The dividing line erty by the federal government can confer sig- between what is and what is not in the nificant economic benefits on the jurisdiction tax (payments in lieu of taxes) base fo- in which the federal facility is located. These cuses on the practical questions of "who benefits are real and can accrue directly in the pays for the subsidy" vs. "who benefits form of higher community incomes and indi- from it." rectly through local multiplier effects that gen- Benefits and Costs. The second argument erate second and third-round increases in local for discounting the PILOT for benefits is economic activity. In fact, there is some evi- based on a net benefit-cost effect of the dence that the federal government's activity federal presence on the local community. may be associated with smaller spending leak- Thus, while this viewpoint accepts the ages, and, therefore, larger local multipliers, unreimbursed cost arguments presented than various types of private sector activity.32 above, it also recognizes that the federal That these benefits are clearly recognized by government, by its presence, indirectly local officials is attested to by the inevitable creates community growth and, thus, in- protests that accompany a proposed defense directly adds sales and income tax reve- plant closing or relocation of a civil agency. In- nues to those that would exist without deed, it is probably fair to observe that those the government's presence. It does not officials who complain most loudly about the and cannot compare these revenues with costs of the tax exempt federal establishment those generated by private economic ac- are also the most likely to wage a strong lobby tivities. Extraordinary Burden. The third variant (local) reasons for preferential treatment of of the benefits argument declares that as U.S. government properties, they should be a general rule the federal property owner treated as if they were fully taxable. Applica- more than "pays its own way"-al- tion of any of these benefits tests to a Boeing though there might be special cases of plant in Seattle (would Seattle exist as it does the existence of an "extraordinary bur- without Boeing?), or the financial industry in den" if the U.S. government crosses some New York, or tourism in Miami Beach, or the sort of federal-to-total-property thresh- grain elevators in Seneca County, Ohio-the old. Just what constitutes this threshold list could go on and on-would, quite correct- is unspecified, but, as discussed in ly, be viewed as the ultimate in political expe- Chapter 2, the presumption is that it is diency. Yet that is just what is being proposed up to the federal government to make here for the federal government. that determination. Thus, as a practical In addition, for many cities that are heavily matter, the threshold is likely to be a impacted by the federal presence, the benefit- function of the level of payment the gov- cost adjustment rationale falls apart when ernment is in the mood to make. As with taken to its logical extreme. It can be plausibly any threshold arrangement, there are no argued, for example, that if the seat of the U.S. a priori guidelines. Thus, of the three government had not been located to meet variants listed here, the "extraordinary George Washington's wishes to have it near burden" argument is already the least de- Mount Vernon, the place we now know as fensible conceptually. Washington, DC, might still be a swamp. At the Although each of these benefits adjustments very least, without the federal goverment, there will narrow the PILOT base relative to what it might not be a large city at that spot on the would be under full tax equivalency, the de- Potomac. Moreover, without Washington, there gree of tax base narrowing will vary with dif- would be no Maryland or Virginia suburbs: this ferent perceptions regarding the appropriate whole federal complex would be located else- classes of federal property. Thus, the applica- where. Thus, the argument goes, the benefit tion of the nonlocal burden test would keep side of the federal presence is so enormous to military facilities in the payments in lieu of Washington that it is folly to even suggest that taxes base, whereas, for at least some jurisdic- the beneficent government establishment tions whose economy is dominated by the base, should now pay local taxes (though it probably the benefit-cost theory might argue for exclu- would under the nonlocal burden variant). Be- sion. Unlike these two scenarios, however, the fore one argues that this extreme viewpoint is design of a base according to some notion of an simply an absurd extension of an historical ac- "extraordinary burden" would begin with the cident and not a modern fiscal concern, it is presumption that all federal property be ex- important to note that this very kind of argu- cluded from the PILOT base, and only then ment is currently being used as one reason the would the payments in lieu of taxes base be de- new Kings Bay, GA, and Kitsap County, WA, termined according to some notion of proper Navy Trident Bases, and the developing Fort specific inclusions for making an in lieu of tax Stewart Army Base in Georgia should not be payment. subject to in lieu real property tax payments- Which of these variants justifies a dis- despite the enormous current and future public counting or downward adjustment from the tax service and infrastructure maintenance costs equivalency approach proposed here? For a being heaped on the host counties and nearby number of reasons, none is persuasive: towns and cities. A benefits adjustment violates the guiding Of course, not all federal facilities can be principle that, by acquiring real property (re- said to have "created" their local communities. call that public domain land is excluded from What, then, about the quite observable fact that the payments in lieu of taxes base), the federal when the federal government plans to relocate government has tacitly assumed the responsi- or shut down a large facility, local officials bility borne by the private property owner. Ac- may strenuously object? Was the coalition of the cordingly, unless there are special home-rule members of Congress from New Jersey, Penn- sylvania, Delaware, and New York acting and costs is a complex and speculative enter- unwisely in the fall of 1979 when it succeeded prise. Procedures for judging relatively small in getting the Pentagon to reverse a decision to developments, i.e., those that do not alter the shut down the recruiting-training operations at structure of an area's economic base, such as a Fort Dix, NJ? No, at least not in the short run. federal water project, have acquired some gen- To argue that it is wrong to include a benefits eral acceptance. But comparable methods have test in the determination of a payments in lieu not been used in analyzing the kinds of inter- of taxes base is not to deny that a military base governmental relationships involved here.36 or a federal civil agency office creates local Not only are the analytical problems involved economic benefits. The two points are simply in measuring costs and benefits unresolved; the not related. total impact of the federal presence would de- In the longer run, however, it is probable that pend on a host of special characteristics unique such public protestations may be unwise. The to each community-e.g., size, nature of the fact is, the local economy might be better off if economic base, and the public service flows be- the federal establishment were to yield to pri- tween the city and its surrounding rural or sub- vate business activity. For example, when urban areas. In short, if it is to be meaningful, a Brookley Air Force Base in Mobile, AL, closed net benefit test would, at the very least, require in 1969 with the loss of 13,600 civilian jobs, separate case studies for each jurisdiction with public protests were described as "bitter" and federal properties within its bordem3' "acute." Now, a decade later, state and local officials see themselves "a lot better off" as a re- .Fixed Formula Approach sult of con~ersion.~~A similar experience can be cited in the case of the Brooklyn Navy Yard, The fourth method examined here for de- closed in 1966 and now leased by New York termining the base of payments in lieu of taxes City to a nonprofit development concern is the fixed fee or formula approach, whereby which, in turn, has leased space in the yard for the payment would be made according to a flat ship repair, shipbuilding, and a variety of man- payment per federal employee, or, perhaps as a ufacturing activities. In fact, according to a fixed percentage of state and local own-source study by the Pentagon's Office of Economic revenue or expenditure. Payment on a flat fee Adjustment (OEA), which helps communities basis not only has the great virtue of adminis- search for new industry, of 77 military bases trative simplicity, but also it scores the highest that were closed between 1961 and 1977, 72 of all the PILOT base options on a Congression- had been put to use for industry, education, al control criterion.38 However, when evalu- aviation, commerce, recreation, or a combina- ated against all other criteria for judging a PI- tion of these. The former bases are now the LOT, the formula approach has the most sites of 47 industrial parks, seven four-year serious shortcomings of all the alternatives be- colleges, and 26 postsecondary-vocational in- ing examined. stitute~.~~The view that many communities Consider the fixed payment per federal tend to benefit over the long run from military worker first. To begin with, there is no a priori base closings was corroborated by John Lynch, link between the size of the federal work force Assistant Director, Office of Economic Adjust- and the value of property on and in which ment, Department of Defense, in testimony be- these employees do their work. Two obvious fore the Commission on the review of the Fed- reasons for this are the leasehold vs. ownership eral Impact Aid Program. According to Mr. dichotomy and the fact that the production Lynch, "Most communities are . . . far better off function (the labor and property mix) will vary with that base converted to civilian use with a widely according to the location and use of the stable civilian taxpayer than they were in its federal property. Thus, in cases such as office previous period of military occupancy."35 building operations, which dominate the feder- Finally, there are serious methodological al activity in many of the country's large cities, problems in each of the proposed benefits ad- there does appear to be a significant direct rela- justments, particularly with respect to the net tionship between federal property value and benefits (benefits-minus-costs) issue. As a re- the number of federal employees. This search undertaking, the estimation of benefits employee-property relationship falls apart when one looks for the same link in areas that percentage approach is local own-source reve- have other than just office type operations. (Ta- nue, relative prices are not changed; but the ble 7, characteristic number 9.) formula now leads to some perverse results.39If Not only does the idea of determining the the federal government were to expand its payment according to a fixed percentage of holdings of tax exempt property, thereby fur- statellocal revenue or expenditure also fail on ther eroding the local property tax base and empirical grounds (as was shown in Table 7 revenues, this approach would suggest a reduc- above, there is no significant relationship be- tion of the payment in lieu of taxes-just the tween real property value and fiscal indica- opposite of the desired effect. tors); it would also distort the public decision- making process. For example, if the base of the Thus, while the simplicity of a fixed fee or fixed percentage approach were total local gov- formula approach is attractive, its other weak- ernment expenditure, the federal payment nesses are critical. The approach makes no rec- would have the effect of reducing the relative ognition of the reasons a payment in lieu of prices of public goods and services, thereby taxes can be justified and, in addition, would generating increases in the size of the public create a whole new set of distortions in inter- sector. Alternatively, when the base of a fixed- governmental fiscal relationships.

FOOTNOTES and relative per-capita income (inversely), urbanized population, tax effort, and state personal income tax coIlections. The alternative formula considers popula- 'Total indirect plus direct U.S. tax expenditure aid to tion, tax effort, and relative per-capita income and is state and local governmens was approximately $18.4 used by 30 states. Also see Cuciti, City Need, op. cit., billion in FY 1980. These expenditures are largely in pp. 55-59 and, generally, Office of Revenue Sharing, the form of the federal tax exempt status of state and U.S. Department of the Treasury, State and Local Data local securities ($5.9 billion) and the deductibility of Elements, 7 and 8, Washington, DC, 1977, et. seq. state and local taxes against the federal income tax 8The programming and processing of the raw data were ($12.5 billion). Note, however, that this $18.4 billion done by Robert M. Stein of Rice University, Hous- represents the revenue loss to the federal Treasury; the ton, TX, and the U.S. Advisory Commission on money does not accrue to the state or local govern- Intergovernmental Relations. ment. Much goes directly to individuals and business 9ACIR, The Adequacy of Federal Compensation to Lo- taxpayers-the entire $12.5 billion of the federal tax cal Governments for Tax Exempt Land, A-68, offset. Federal government tax expenditure estimates Washington, DC, U.S. Government Printing Office, are produced in Congressional Budget Office, Five- July 1978, p. 117ff. Year Projections and Alternative Budgetary Strategies lo Currently 21 states and the District of Columbia assess for Fiscal Years 198044: Supplemental Report on Tax tax exempt property located within their borders. Expenditures, Washington, DC, Congressional Budget "See remarks by Nonna Noto on the "Local Taxation of Office, 1979, 55 pp. Business," at a conference sponsored by the American =ACIR staff computations, "Federal Grants-In-Aid In University School of Law and the Multistate Tax Com- Relation To State and Local Receipts From Own mission, Washington, DC, October 1979, in The Ameri- Sources, Total Federal Outlays, and Gross National can University Law Review, Washington, DC, Winter Product, 1955-81," unpublished study, June 1980. 1980, p. 305. I 3This generally accepted division is used by Peggy L. 12Section 322 of the Economy Act of June 20, 1972, as Cuciti, in City Need and the Responsiveness of Federal amended; Section 15, Title I1 of the Economy Act of Grants Programs (Committee Print), a report to the Sub- March 3, 1933 (40 USC 278a), as amended. committee on the City of the committee on Banking, I3Note that not all of this rented area is designated as the Finance and Urban Affairs, U.S. House of Representa- same usage category as the area measured by BOMA. tives, 95th Congress, 2nd Sess., Washington, DC, U.S. Thus, the downtown estimates are probably overstated. Government Printing Office, 1978, 81 pages. The defi- 14Conversations with USPS realty management person- nitions used by Cuciti are essentially the sgme as those nel. adopted here. Isunited States Postal Service, Realty Acquisition and 41bid., pp. 64-65, 72. Management, RE-1, TL-1, 7-1-75, at 6-203, "Tax Provi- SIbid., pp. 71-72. sions." 6U.S. Department of the Treasury, Fiscal Impact of the I6U.S. General Accounting Office, Costs and Budgetary Economic Stimulus Package on 48 Large Urban Gov- Impact of the General Services Administration's Pur- ernments, Washington, DC, U.S. Government Printing chase Contract Program, LCD-80-7, Washington, DC, Office, 1977. U.S. Government Printing Office, 1979, p. 2. 7The first formula is currently used in 20 states and 17Ibid., p. 6. considers five factors: population, relative per-capita lBUSPS, Realty Handbook, at 6-203.2, emphasis added. income (inversely), urbanized population, tax effort, '9U.S. General Accounting Office, Costs and Budgetary and state personal income tax collections. The Impact, op. cit. alternative formula considers population, tax effort, 2OFor a comprehensive review of procurement practices prior to 1972, see the six-volume Report of the Com- 28 An "antiwindfall" provision was proposed in the Bu- mission on Government Procurement, Washington, DC, reau of the Budget's Executive Communication No. 722 U.S. Government Printing Office, 1972. A recent re- Regarding Payments in Lieu of Taxes, Washington, DC, view of the procurement issue is provided by the U.S. August 16, 1951. This communication provided the ex- General Accounting Office, Legislative Recommenda- planatory statement for the proposed 1951 payments in tions of the Commission on Government Procurement: lieu of taxes legislation. 5 Years Later, Washington, DC, U.S. Government Print- 291bid., P. 8. ing Office, July 1978, 26 pages. 30Ibid. 2lFor example, see the discussion in Marion Clawson, "This section relies heavilv uuon Michael E. Bell. Suburban Land Conversion in the United States, "Alternative Treatment of ~overnment-ownedTax EX: Baltimore, MD, The Johns Hopkins University Press, empt Properties In Urban Areas," Proceedings of the 1971, pp. 355-59. 70th Annual Meetings of the National Tax Association- 22For a review of the literature, see Robert D. Ebel, "Re- Tax Institute of America, Louisville, KY, 1977, pp. search and Policy Developments: Major Types of State 174-182. and Local Taxes," in John E. Petersen, Catherine 32First Hawaiian Bank, The Impact of Exports on Income Lavigne Spain, and Martharose F. Laffey, eds., State in Hawaii. Honolulu. HI. First Hawaiian. 1972. and Local Government: Finance and Financial Man- 33John ~erbkrs,"Cities Find Conversion df Old Military agement, Chicago, IL, Municipal Finance Officers As- Bases a Boon to Economics," The New York times, p. sociation, 1978,pp. 1-21. A-1, April 26, 1979. 23John M. Quigley and Roger W. Schmenner, "Property 340ffice of Economic Adjustment, Summary of Com- Tax Exemption and Public Policy," Public Policy, pleted Military Base Economic Adjustment Projects, Summer 1975,pp. 295-297. 1961-1979, Washington, DC, The Pentagon, 1979, 26 24F~ra discussion of this suburban fiscal exploitation, pages. A similar view that, over time, communities see Kenneth V. Green, William B. Neenan, and Claudia benefit from military base closings is presented in Da- D. Scott, Fiscal Interactions in a Metropolitan Area, vid A. Mackinnon, "Military Base Closures: Long Lexington, MA, Lexington Books, 1974. Range Economic Effects and the Implications for In- 25The order required that agencies not only remain in cit- dustrial Development," AIDC Journal, American In- ies, but, when feasible, move back in from the suburbs. dustrial Development Council, Inc., July 1978, pp. In the two years since the order was issued, more than 7-41. 230 offices were moved back into central business ar- 35 John Lynch testimony of May 28, 1980, to the Commis- eas by the General Services Administration. However, sion on "The Review of the Federal Impact Aid Pro- there are pressures for a change in policy. For a gram." Letter to ACIR from Judith Jacobsen, June 1980. discussion, see: John Goodale, "Putting Federal Offices 36For a contrary view which is not accepted here, see Downtown-The Suburbs Are Yelling 'Foul'," Nation- Henry J. Raimondo, "Compensation for Tax Exempt al Journal, November 15, 1980,pp. 1935-37. Property in Theory and Practice, Land Economics, Feb- ruary 1980, pp. 33-42. 26Lewis H. Greensword, "Grants In Lieu of Taxes on 37This conclusion is also presented in a Wisconsin State Federal Property," Proceedings of the 41st Conference study, Payments in Lieu of Taxes on State Owned of Assessment Administration, Washington, DC, Sep- Lands, report of the University of Wisconsin Public tember 1975. Mr. Greensword is Chief, Municipal Lands Impact Study Committee, Madison, WI, February Grants Division, Canadian Department of Finance. 1967. 2'See Chapter 3. Robert M. Stein, "Federal Categorical 38U.S. General Accounting Office, Alternatives for Aid Equalization and the Application Process," a paper Achieving Greater Equities in Federal Land Payment presented at the Annual Meeting of the American Soci- Programs, op. cit., p. 39. ety for Public Administration," Baltimore, MD, April 39Michael E. Bell, "Alternative Treatments," op. cit., p. 1-4, 1979. 181.

Chapter 5

Quantitative Aspects: the Base and Yield of a PILOT

Information on the magnitude of the current value of federal tax exempt real property and the cost and geographic distribution of a compensatory PILOT program is essential in order to make sound policy judgments regarding the enactment of a federal PILOT. Accordingly, a major focus on this study was on providing those estimates. The method of making the estimates and the results are summarized in this chapter. A detailed description of the methodology is provided in Volume 2. This chapter is divided into three parts. The first summarizes briefly the nature of the his- . torical cost records regarding the federal government's real property holdings and the methods employed in this study to derive estimates of the current value of those properties. The second part presents the PILOT base and payment numbers under varying assumptions regarding the scope of the PILOT and its military vs. civilian and urban vs. nonurban divisions. This is followed by details on the geographic impacts of the PILOT as defined in Chapter 3. Finally, the third part of this chapter presents alternative strategies for the replacement of all or a portion of the 57 existing payment programs discussed in Chapter 2 and listed in Tables 1 and 2 of this volume. As is clear from a reading of this Commission's formal recommendation for authorization of a uniform PI- LOT based on real property tax equivalency, this replacement approach was a key element in the Commission's deliberations. ESTIMATING THE CURRENT VALUE OF in time, current value estimates of federal FEDERAL REAL PROPERTY (1978) property were computed using both "from" and "to" dates. Thus, in the ex- Aggregate Data ample of the hypothetical property above, the property has the following A detailed description of the state of the art range of values in 1978: regarding the federal government's knowledge Cost Multiplier Current Value of its own real property value is provided in [I 978) Volume 2. The major methodological points re- "From" $100,000x 1.98 = $198,000 ported there are: "To" 100,000X 1.77 = 177,000 Except for some data on buildings and As Volume 2 details, although this is the structures and facilities (and land for the basic approach, the actual procedure was Department of the Army) collected by the a good deal more complicated because of various branches of the military, there is problems regarding the treatment of de- no attempt by the U.S. government to preciation of buildings and structures maintain current estimates of the value of and facilities and the range of the "from" its real property holdings. and "to" dates. The U.S. inventory of its real property is This same process was repeated, using limited to information on the cost of ac- the GSA inventory for civilian properties quisition of each federally owned build- only and then adding the values inde- ing, structure and facility, and parcel of pendently estimated from Army, Navy, land (GSA officials, who are in charge of and Air Force data. This was done in or- this inventory and who must rely on the der to provide a "check" or comparison accuracy of the reports provided to them for both the GSA and GSA-plus-military by all other government agencies, indi- data. Although the Army was the only cate that some federal properties are branch for which an estimate of current probably not listed in the inventory). land values could be obtained, the data However, for many of the buildings and in Table 20 indicate that each of these facilities and structures entries, the cost two approaches gives comparable results, data are associated with a "from" and the GSA-plus-military data being the "to" date. Thus, a piece of real property larger of the two estimates. However, be- may have the following cost information: cause the GSA inventory was more comprehensive and easier to manipulate, From To nearly all of the PILOT base and payment Cost: $100,000 1950 1952 numbers used in this chapter are based on only the GSA inventory. Such data are published annually by GSA and by each branch of the military. At the PRESENTATION OF THE NATIONAL PILOT time this ACIR analysis was made, the BASE TOTALS most recent data were in the 1977-78 GSA inventory. The national estimates of the PILOT base are The procedure for estimating the current presented in Tables 19 and 20. Two types of value of federal real property was to use basic data are presented and are referred to as the GSA listing, which includes both ci- "Regular Phase" (e.g., Phase I, Phase 11, etc.) vilian and military properties, as a basis and "Phase A" (e.g., Phase I-A, Phase 11-A, for updating the cost figure for each indi- etc.). The only difference stems from the fact vidual property entry by a growth multi- that the GSA real property inventory frequently plier. This multiplier was developed lists parcels by acquisition cost on both a from construction cost indexes as well as "from" date-the year the property was initial- from established techniques for adjusting ly acquired-and a "to" date or the last year for depreciation. Because the multipliers the property was acquired (in the case of land) to be used will increase as one goes back and/or improved (in the case of buildings). The other real property category-structures and which limit the scope of the PILOT base to facilities-is treated as having only a "to" various components of the "nonopen space" date. properties as defined in Chapter 3 (e.g., mili- Rather than choosing between the "from" tary vs. civilian, urban vs. nonurban). In addi- and the "to" date for application of our real tion, there is a clear preference for the use of property multipliers, multipliers were applied "Regular Phase" rather than "Phase A" data. to both years: This preference is founded on at least two grounds: Regular Phase Data: provide estimates of current plant value of federal property, as- I. Using regular phase data implies that suming the "from" date is always used- most of a building was constructed in i.e., for both land and buildings. the first year or two of its life during the "from" and current (1978) years, and Phase A Data: provide estimates of current that the "to" date largely reflects struc- plant value of federal property, assuming tural improvements (not repair, which is the "from" date is still used for land and the "to" date is used for buildings. As a re- not reflected in these values) andlor less than major additions to the building. sult, as Table 19 shows, regular phase esti- This is a more plausible assumption mates are always larger than "A" phase es- than that which the Phase "A" data timates. requires-viz, that although the build- It should be recognized that the "A" phase ing was begun in a given year, the major uses the "from" date for land. Again, the only part of its construction was delayed, difference between "Regular" and "A" phase sometimes for quite a long period of data is that the "to" date was applied in time. estimating the value of buildings. There are 2. The ACIR methodology used to estimate three reasons for using a "from" date for land all phases of these numbers (Volume 2) throughout. First, the procedure used here as- tends to be conservative-especially sumes that the bulk of any parcel of federal land is acquired at the first date of acquisition. when compared with the procedures employed by the military. Accordingly, Additions of land to the individual parcels are using the higher "regular" phase num- assumed to be so small, relative to the total bers will minimize the likelihood of un- land holdings, that to use the "to" date would seriously understate current land values. Sec- derestimating the current value of federal property. ond, whereas a review of the GSA inventory shows that most buildings have a "from" and Using the regular phase estimates, Table 19 "to" date, most land has only the initial (from) shows that, for 1978, given the PILOT base as date. This observation, thus, supports the as- defined in Chapter 3 : * sumption noted just above. And, third, a manual review of the GSA inventory for land indi- The total value of federal property holdings in the U.S. was $210 billion. cates that when land has a "to" date, it is Of that total, 38% ($80 billion) can be at- usually (a) for 1978, and (b) so listed by the Army and Air Force in what is believed to be tributed to civil uses. The remaining 62% an arbitrary entry. Thus, using a "to" date for is military. land would, in effect, mean entering a parcel at Central urban counties (which include its cost acquired in, say, 1920 as if that same central cities) account for $33 billion, or 1920 dollar cost existed in 1978. approximately 42% of the civilian hold- As shown in Table 19, the total value of all ings. federally owned real property in the U.S. is The larger part of the total value of feder- $279 billion (Phase I), using the "from" dates al property is held outside the central for buildings, and $209 billion if the later, or county area, largely because of the loca- "to" dates, are used (Phase I-A). For purposes of this study, however, the *Excluding certain categories of federal real property, most pertinent data are in Phases I1 through V, which primarily reflected "open spaceM-typeuses. Table 19

ESTIMATES OF 1978 REPLACEMENT VALUE OF FEDERALLY OWNED REAL PROPERTY, BY ALTERNATIVE REAL PROPERTY BASES (PHASES) (in thousands of dollars)

Valuations Structures and Phase Description Land Buildings Facilities Total

Phase l All federally owned real property in US. $278,754,024 Phase IA All federally owned real property in US., to date 209,018,705 Phase ll Federally owned real property in US., excluding certain usage categories for "open space" lands 210,182,647 Phase llA Federally owned real property in U.S., excluding certain usage categories for "open space" lands, to date 140,447,328 Phase Ill Federally owned real property in U.S., excluding certain usage categories, for civil functions only 80,045,373 Phase lllA Federally owned real property in US., excluding certain usage categories, for civil functions, to date Phase IV Federally owned real property in U.S. urban counties, excluding certain usage categories, for civil functions only 33,438,936 Phase IVA Federally owned real property in US. urban counties, excluding certain usage categories, for civil functions only, to date 27,149,042 Phase V Federally owned real property in US. nonurban counties, excluding certain usage categories, for civil functions only 46,606,437 Phase VA Federally owned real property in US. nonurban counties, excluding certain usage categories, for civil functions only, to date 46,606,437

SOURCE: AClR staff computations.

112 Table 20 REPLACEMENT VALUE ESTIMATES FOR MILITARY REAL PROPERTY OWNED BY THE FEDERAL GOVERNMENT, 1978 (in thousands of dollars) Structures Total and with Division Description Buildings Facilities Subtotal Land Land

Group I Military real property owned by the federal government in U.S., with certain usage categories excluded Air Force $ 34,502 $ 25,652 $ 60,154 N.A. N.A. Army 43,968,535 46,154,609 90,123,143 $3,260,511 $93,383,655 Navy N.A. N.A. 55,265,140 N.A. N.A .

Total Group I1 Military real property owned by the federal government in U.S. urban counties, with certain usage categories excluded Air Force 19,828 13,163 32,991 N.A. N.A. Army 20,358,204 3,675,554 24,033,758 1,413,656 25,447,415 Navy N.A. N.A. 31,767,568 N.A. N.A.

Total Group 111 Military real property owned by the federal government in U.S. nonurban counties, with certain usage categories excluded Air Force 14,673 12,489 27,163 N.A. N.A. Army 23,610,331 42,479,054 66,089,385 1,846,854 67,936,239 Navy N.A. N.A. 23,497,572 N.A. N.A.

Total N.A. = Not Available. SOURCE: AClR staff computations. tion of structures and facilities and their rately estimated Phase I1 data, a fact that can be respective spatial demands and various explained by the large upward bias in the mili- functions. tary estimation procedures. See Volume 2. The results of combining estimates based on the GSA inventory for property in civilian uses Detailed Data with estimates based on data supplied by the Air Force, Army, and Navy are presented in As part of the analysis for this study, esti- Table 20. The findings are not fully compara- mates were made for several sets of data. The ble with the numbers in Table 19, as the Navy following tables were derived for all five regu- and Air Force did not have sufficient informa- lar data sets (45 tables): tion (presumably independently of GSA) to give land value estimates. Subject to this im- GSA Table Reference portant shortcoming, however, Table 20 (See Volume 2.) shows: The Army is the largest owner of real 6 Federally owned (FO) real property by property (buildings and structures), ac- state counting for 62% of the total. These data 7 FO real property by agency and bureau are presented in the Group I division. 11 FO land by agency and predominant usage class (e.g., storage, park, his- Group I1 and 111. data. provide central toric site, grazing, etc.) urban county and nonurban county 12 FO land by state and predominant breakdowns. Not surprisingly, due to the usage land-intensive nature of military bases 13 FO buildings by agency and predomi- and other defense properties, the bulk nant usage (62%) of military holdings are "non- 14 FO buildings by state and predominant urban." usage Within central urban counties the values 15 FO structures and facilities by agency of military properties are also a bit more and predominant usage evenly distributed, as the Army's hold- 16 FO structures and facilities by state and ings account for only 44% of the real predominent usage property in this division. However, the 23 FO real property in the U.S. by state disparity between Army and all other and agency and bureau. military real property values increases to Print outs for Phase A estimates were also 74% in nonurban areas. made of those tables indicated by an asterisk The higher nonurban incidence of military (*) to the left of the table reference number (25 real properties, combined with the relative im- tables). portance of military to total federal property values in the U.S., serves to highlight an im- I Table 21 portant feature for policy discussions of the ESTIMATED VALUE ESTIMATES characteristics of a PILOT: that any attempt to FOR CIVIL AND exclude "defense" from the PILOT base will MILITARY REAL PROPERTY not only significantly erode the base; it also will be a decidedly antismall city and antirural Current Value decision. Division (in thousands) Table 21 presents the computational "check" of the two sets of data referred to earlier. For Phase Ill and Group I example, the sum of Phase I11 and Group I Phase lllA and Group I shows the civilian PILOT base plus the military Phase IV and Group II Phase IVA and Group II PILOT base. The total equals $228.7 billion Phase V and Group Ill even without the Navy and Air Force land Phase VA and Group Ill value data. This figure is higher than the sepa- Because cost constraints prohibited the re- state data are arranged by region in the charts. production of all 70 tables, this report provides Note even when national park areas, grass- the above detailed information for regular lands, and other open space-type lands are ex- Phase I1 data only-i.e., for the current value of cluded, in terms of absolute value measures the all federally owned real property in the U.S., southeast and the far west regions together ac- excluding those "open space" categories listed count for half of the federal government's real in Chapter 3. Presented in their entirety in property value. Volume 2, these data are the focus of the re- Chart 6 is one of the most interesting of these mainder of this chapter, as they provide the es- presentations, as it indicates the relative im- timates most relevant for policy deliberation pact of federal real property holdings by states pertaining to the Commission's recommenda- and regions. By relating the data in Table 22 to tion for a comprehensive federal payment in the total value of federal plus assessed private lieu of tax system for real property. These find- taxable property, the chart provides an inter- ings pertaining to the current value of federal esting perspective on the degree of real proper- real property (1978) are presented in a series of ty tax base erosion created by the federal pres- charts and tables: ence. By region, the major impacts are clearly Chart 3 shows the value of real property in the southeast and in most areas west of the owned by various civil agencies as a percent of Mississippi River. total federal civil property in the U.S. As is evi- The state-by-state comparisons are equally dent from the chart, the largest single holding interesting. Not surprisingly, the District of Co- can be attributed to one of the most recently or- lumbia, which serves as the Nation's Capital, is ganized federal departments, the Department of shown to be the most heavily impacted area. Energy. The next largest amount is attributed With federal real estate comprising about 5% of to GSA, an agency which "owns" many of the the total federal plus private taxable values for buildings that are actually used by other the U.S. as a whole, the federal proportion in agencies. Thus, if one is talking about the DC is over one-third. DC government officials "control" of federally owned real property in have long pointed to this feature as a major an actual use sense, many of the other agencies contributor to that city-state's fiscal problems. in the chart would see increases in their per- Also evident from Table 22 is the impact on centage allocations and GSA would show a many of the plains and western states large decrease. (including Hawaii) of the military presence and Chart 4 shows the value of real property the buildings and structures and facilities that owned by various military branches as a per- serve those U.S.-owned land areas which have cent of total defense property in the U.S. These been excluded from these estimates. Those in- findings are quite straightforward and indicate terested in the values of federal property by that the Army controls the single largest particular usage categories for individual states amount of the defense property owned in this (e.g., office buildings, military, institutional, country. Beyond making this observation, it is housing, storage, industrial, and research and difficult to draw many other policy conclu- development) should refer to Volume 2 for fur- sions regarding the relative "control" of prop- ther detail. erty among the military branches. This is because the data in Chart 4 (as well as those in PILOT YIELD Chart 3) do not reflect the value of property Before presenting the estimates made for the leased from the private sector or technically yield of a PILOT based on property tax equiva- owned by GSA. Again, regarding the distinc- lency, it must be recognized that these pay- tion between GSA-owned and used buildings, ment amounts, which are simply computed as it is noteworthy that the Pentagon building in the product of the federal property value base Arlington, VA, is owned not by the Department times an effective property tax rate, have an up- of Defense, but by GSA. ward bias. There are two practical reasons for Table 22 and Chart 5 present information on this phenomenon. First, even if Congress were the state-by-state distribution of the federal to grant its consent to a PILOT, it is quite plau- government's real property holdings. These sible that, at least initially, some local govern- Table 22 THE VALUE OF FEDERALLY OWNED REAL PROPERTY IN THE UNITED STATES, BY STATE, 1978 Value in Thousands of dollars

Number of Structures Installa- Number of and State tions Buildings Land Buildings Facilities Total

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida

~aw& Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island

South Carolina South Dakota Tennessee Texas Utah

Vermont Virginia Washington West Virginia Wisconsin Wyoming

U.S. Total

SOURCE: AClR staff computations. Chart 3 VALUE OF REAL PROPERTY OWNED BY VARIOUS ClVlL AGENCIES AS A PERCENT OF TOTAL FEDERAL ClVlL PROPERTY IN THE UNITED STATES, 1978

- 13.3% - 10.5% - 9.8% 8.0% 7 4% 10.0% 4.8%

Total Civil Department of General U.S. Postal Veterans Department of National Tennesseee Department of All Other Energy Services Servlces Adm~nistration the Interior Aeronautics Valley Transportation Civil Agencies Adm~nistration 8 Space Authority Admlnistration

SOURCE: Volume 2.

Chart 5 VALUE OF FEDERALLY OWNED REAL PROPERTY IN THE UNITED STATES, BY STATE AND REGION, 1978

Value of Percent State and Region Property of $Thousands) Federal UNITED STATES

NEW ENGLAND Connecticut Maine Massachusetts New Hampshire Rhode Island Vermont

MiDEAST Delaware District of Cotumbi Maryland New Jersey New York Pennsylvania

GREAT LAKES lllino~s Indiana Michigan Ohio Wisconsin

PLAINS Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota

SOUTHEAST Alabama Arkansas Florida Georgia Kentucky Louisiana Mississippi North Carolina South Carolina Tennessee Virginia West Virginia

SOUTHWEST Arizona New Mexico Oklahoma Texas

3OCKY MOUNTAIN Colorado Idaho Montana Utah Wyoming

'AR WEST 49.823.900 23.71% California 25.384.100 m- 12.08% Nevada 1.223.400 .58% Oregon 3.016.200 1.44% Washington 9.611.100 4.57% Alaska 5.612.600 2 67% Note: Detail may not add to totals due to rounding. Hawaii 4.976.500 t2.37% SOURCE. Volume 2. Chert 6 VALUEOFFEDERALREALPROPERTYASPERCENTOFMARKET VALUE OF FEDERAL PLUS ASSESSED PRIVATE TAXABLE PROPERTY. BY STATE AND REGION. 1978 IState and Region

NEW ENGLAND Connecticut Maine Massachusetts New Hampshire Rhode Island Vermont

MIDEAST Delaware District of Columbia Maryland New Jersey New York Pennsylvania

GREAT LAKES Illinois l ndiana Michigan Ohio Wisconsin

PLAINS Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota

SOUTHEAST Alabama Arkansas Florida Georgia Kentucky Louisiana Mississippi North Carolina South Carolina Tennessee Virginia West Virginia

SOUTHWEST Arizona New Mexico Oklahoma Texas

ROCKY MOUNTAIN Colorado Idaho Montana Utah Wyoming

FAR WEST California Nevada Oregon Washington Alaska Hawaii

Note: Details may not add to totals due to rounding SOURCE: AClR staff compilations. ments will not assess the federal properties. 3. The Census Bureau's figure of 1.8%-the Currently, only 21 states and the District of Co- median rate estimated for all federal lumbia require assessment of federal real prop- property in the U.S. The yield would erty; thus, it is reasonable to expect that some then be $3.8 billion. * localities in the other 29 states will not have adequate staff resources to join the PILOT program immediately. Second, and more important, is that these 'The 1977 U.S. Census of Governments computed the payment estimates have not been subjected to 1976 median effective property tax rate for each of the inevitable pressures for downward adjust- the cities of 50,000 population or more for which a sufficient sample of measurable sales was available, a ment that would occur if the federal properties total of 492 local areas. The data showed a 1.8% ef- were in the "taxable" arena. Thus, local esti- fective rate for the group of "all types of realty." The mates of the assessed value of federal property data were not grouped by state or region; the median was derived from a national sample. The median rate may be overstated for several reasons, ranging was slightly higher in cities with less than 100,000 from the nature of the assessment and billing population, 1.9%, while cities over that population cycle (relatively few jurisdictions have annual mark showed a lower median rate of 1.6%. See 1977 Cen- cycles) and the accuracy of assessments (ap- sus of Governments, Vol. 2, pp. 25-28. peals could be expected) to the politics of the If these median rates are applied to the ACIR esti- local property tax rate policy. * mates of the value of federal real property, another estimate for federal PILOT liability can be derived for In addition to these practical problems in the U.S. as a whole and for the groups of urban coun- estimating the payment amounts for the PILOT ties and nonurban counties used in the ACIR data sets. The logic behind using different effective tax base, the choice of the correct effective tax rate rates for each of the county data sets would be the as- will influence the overall (though not relative) sumption that nonurban counties would not include levels of the PILOT to be paid to various juris- taxing jurisdictions with more than 50,000 or 100,000 population. Conversely, it would be assumed that dictions. Because it was impossible for pur- most of the 315 central urban counties, which in- poses of this report to determine the effective clude all or major portions of each SMSAs central rate for each of the several thousand local real city, if not major portions of the SMSA itself, would property taxing jurisdictions, it was necessary represent those jurisdictions with populations larger than 100,000.To be sure, there would be some urban to consider several national and state average counties that would include cities within the rates. The following effective rates were con- 50,000-100,000range, and would thereby be classified improperly, and understate PILOT estimates. sidered: However, when dealing with estimated valuations of 1. this magnitude, the basic trends that are illustrated A rate of 1.74%, which would yield ap- are important and it can probably be safely assumed proximately $3.65 billion when applied that the "overstated" estimate rates and PILOTS from to the Phase I1 base. This rate was deter- the nonurban counties would compensate. mined by estimating, on a state-by-state The estimates that result from these comparisons are basis (including the District of Colum- as follows: Estimated bia), the tax equivalent PILOT as deter- Value Estimated mined by the product of the total federal of Federal Effective Federal PILOT Basic Data Set Property Tax Rates Liability assessed value in that state and either (dollar amounts in thousands) the FHA effective rate for 1977 or, where Phase I1 $210,182,847 1.8% $3,783,288 Phase I11 and available, the higher effective classified Group I 228,754,323 1.8 4,117.579 property tax rate. (Table 23.) Phase IV and Group I1 (urban counties) 90,885.911 1.6 1,450,875 2. A 1978 FHA first-quarter-only effective Phase IV and rate of 1.56, which will yield a total of Group 111 (nonurban $3.3 billion. counties) 138.087 ,412 1.9 2,823,281 The total PILOT liability yielded from the variable effective tax rates is only slightly smaller, $4,074,255 thousand, or a difference of $43,322 thousand from *Regarding this latter point, if all exempt property what was computed using a 1.8% overall effective tax were fully taxed, the overall effective property tax rate. This difference is attributable to the approxi- rate would presumably fall, particularly in jurisdic- mate 40% central urban county/60% nonurban county tions heavily impacted by federal properties. mix of the federal property. I Table 23 I EFFECTIVE PROPERTY TAX RATE USED TO COMPUTE ESTIMATED FEDERAL PROPERTY TAX PAYMENTS,' 1978

8 Estimated Estimated Effective PILOT Lia- Effective PILOT Lia- Property bility (in Property bility (in Tax Rate thousands Tax Rate thousands States (percent) of dollars) States (percent) of dollars)

United States, Total 1.74% $3,657,0602

Alabama3 0.74 49,316 Missouri 1.59 51,839 Alaska4 1.73 97,097 Montana 1.31 28,428 Arizona3 1.72 91,492 Nebraska 2.48 35,438 Arkansas 1.49 21,952 Nevada 1.71 20,920 California 2.21 560,989 New Hampshire5 2.38 7,167 Colorado 1.80 74,799 New Jersey 3.31 144,739 Connecticut 2.1 7 28,990 New Mexico 1.65 63,033 Delaware 0.88 4,839 New York 2.89 248,004 District of Columbia4 1.78 134,524 North Carolina 1.35 45,740 Florida 1.13 86,894 North Dakota 1.26 24,005 Georgia 1.27 70,058 Ohio 1.26 70,143 Hawaii 0.95 47,277 Oklahoma 0.95 29,258 Idaho 1.46 21,851 Oregon 2.25 67,865 Illinois 1.90 124,095 Pennsylvania 1.85 85,197 Indiana 1.66 38,587 Rhode Island5 2.27 22,539 Iowa 1.76 14,684 South Carolina 0.82 38,571 Kansas 1.37 53,000 South Dakota 1.79 25,292 Kentucky 1.25 43,861 Tennessee 1.40 110,051 Louisiana 0.61 15,757 Texas 1.84 21 6,007 Maine 1.65 20,205 Utah 1.03 20,228

Maryland 1.69 132,832 Vermont5 2.21 2,959 Massachusetts 3.50 119,076 Virginia 1.21 128,445 Michigan 2.63 52,488 Washington 1.75 168,195 Minnesota3 1.39 31,745 West Virginia3,4 0.78 6,361 Mississippi 1.10 22,91 7 Wisconsin 2.22 29,438 Wyoming 0.87 7,872

/ Note Delail may not add lo total due lo rounding

'The effectwe property tax rate Is the percentage that tax llabll~tyIS 01 the market or true value of the house The average effectlve property tax rate IS derlved from ex- sting slngle famlly homes wlth FHA-msured mortgages. The rate IS for 1977 2Th~sflgure differs sllghtly from that shown In Table 24 due to roundmg =Tax classlfcatlon systems In the follow~ngstates were adjusted with thelr respective effective property tax rates: Alabama. .98: Arlzona, 2.48; Minnesota, 3.0. West Vlrglnla, 1 10 These rates were supphed dlrectly to the ACIR by tax offlc~alsIn the stales. SOURCE: AClR staff computatlOnS; ACIR, Bgnifrcent Fealures of Fiscal Federabsm 'Rate IS for 1975; 1977 rate not available 1978-79 Edllion, M-115, Washmgton. DC. U S. Government Prlnttng office: $Rate IS for 1974: 1975 and 1977 rates not avallable 1979, Table 36, p, 56 The amount of the PILOT using each of these 2. The basic source of the Table 23 rates are alternatives is set forth in columns 1-3 of Ta- the data compiled by the U.S. Department of ble 24. As the table shows, the payment is com- Housing and Urban Development on average puted for each of the alternative types of PILOT effective property tax rates for existing single- bases (Phase I through V-A and the military family homes with FHA-insured mortgages. Al- estimates)-although the focus of this ternatively, another set of state effective prop- discussion is on Phase 11. Column 4 of the table erty tax estimates can be obtained by using presents the estimate assuming a 2.0% rate as a U.S. Census data by multiplying nominal tax likely upper limit. rates by state times state assessment sales ra- Three comments on methodology should be tios. Both the FHA and Census numbers have, made regarding the ACIR judgment that the characteristically, some sampling errors built "best" rate for policy purposes is 1.74%: into them. Upon detailed examination of the nature of each of these data sets (FHA and Cen- 1. As noted, the rate was essentially derived sus), it was decided that the FHA data would from the state totals presented in Table 23. be most useful for purposes here. Clearly, since the property tax is overwhelm- The use of FHA data to estimate a PILOT re- ingly a local levy (local governments account quires two assumptions. Not only are the ef- for 96.6% of the $67.6 billion in total property fective rates on single family homes assumed tax collections in 1978),' preparing state-by- to be representative of all real property in the state estimates of a tax equivalent PILOT is a state, including residential and commercial; in risky business. Nonetheless, because of raw addition, the value of federal property is as- data constraints (there is no compendium of sumed to be distributed across the state's local the effective rates of all local governments), the property taxing jurisdictions in the same pro- statewide rate data, which is a population- portion as all the other property. The latter as- weighted average, is the most reliable disag- sumption permits the use of the same relative gregation available short of a survey of all U.S. proportions of effective property tax rates local property tax jurisdictions. throughout a state-no minor assumption.

Table 24 ESTIMATED PILOT PAYMENTS FOR EACH PHASE AND GROUP, BY VARYING NATIONAL EFFECTIVE TAX RATES (in thousands of dollars) Phase and Group FHA (1.56) Census (1.8) AClR (1.74) 2.0

Phase l Phase IA Phase I1 Phase llA Phase Ill Phase lllA Phase IV Phase IVA Phase V Phase VA Group I* Group It* Group Ill*

* Totals include Army land.

SOURCE: Tables 19 and 20 However, because of the prohibitive cost of 1978 federal tax base data; thus Table 23 reads reproducing and printing county-by-county "1978." This use of rates for years prior to 1978 PILOT data and the GSA's uncertain method of lends an upward bias to the PILOT estimates as providing substate data on the cost of federal U.S. property tax rates have been falling, not property, this assumption was accepted and its only between 1977 and 1978, but also through- shortcomings simply acknowledged here. out the second half of the 1970s. Nevertheless, for at least two reasons, the as- sertion that the FHA rates are representative of those that would be applied to federal property PILOT AS A REPLACEMENT FOR for PILOT purposes is reasonable and work- CURRENTADHOCPROGRAMS able. First, for those states using a uniform (nonclassified) property tax system, the law re- The discussion in Chapter 2 detailed a num- quires that the same nominal rate that is ap- ber of ad hoc federal payment programs that plied to FHA houses also be applied to com- Congress has established over the years in mercial property-the type of "property" this order to compensate state and local govern- report assumes federal holdings to be. The only ments for the fiscal effects of federal activities problem here is that some homeowners in some operating within their borders. However, be- states are the beneficiaries of two important cause these programs are of an ad hoc nature, tax relief devices which are unavailable to they can only be characterized from a national owners of commercial property-circuit break- perspective as a patchwork of uncoordinated ers (in 30 states plus the District of Columbia in programs. Accordingly, one of the benefits to 1978-79) andlor homestead exemptions (37 be derived from the enactment of a comprehen- states and DC in 1979)-and have the practical sive PILOT, from a Congressional workload as effect of reducing effective tax rates on residen- well as economic policy view, would be the tial proper tie^.^ Thus, other things being equal, use of the uniform PILOT as an opportunity for the use of FHA rates probably understates the rationalizing the entire federal payment cost of a PILOT in some states. The complete program-that is, to enact the tax equivalency extent of this understatement is, however, not PILOT which would replace several of the large. In 1977, total circuit breaker and home- existing ad hoc programs. stead benefits were approximately $950 mil- Three such replacement strategies should be lion and $880 million respectively, each less considered. The first would be to eliminate all than 1.5% of total residential real property existing state and local receipts-revenue shar- taxes collected for that year.4 ing and ad hoc in lieu of tax payments made Second, possible errors leading to an under- throughout the U.S. in favor of the full tax statement of the effective rates to be applied to equivalency PILOT applied to all federal real federal real property in the nine states plus DC, property. * This would mean eliminating the with a classified property tax in 1978, were $2.04 billion of payments listed in Tables 1 minimized by obtaining (via direct correspon- and 2 of Chapter 2-i.e., those payments and dence) statewide estimates of the effective tax sharing programs that are targeted to "open- rates applied to commercial properties in four space lands" and, where applicable, "non- of the classifying states (Alabama, Arizona, Minnesota, and West Virginia). These classified effective rates were used in computing the *The state and local recipient guideline is an impor- numbers in Table 23. tant one if statellocal sleight-of-hand is to be avoided here. Under the provisions of the Payment in Lieu of 3. Finally, it should be noted that in order to Taxes Act of 1976, the 1976 PILOT is reduced by any use FHA data for all but the four states that revenue from the public lands that is actually re- were able to supply data on their classified ceived by the unit of local government during the preceding fiscal year under nine existing land property tax, it was necessary to use 1977 rath- revenue-sharing payment plans. Since these provi- er than 1978 rates. The 1978 figures were sim- sions refer only to local government recipients, some ply not yet available. These 1977 rates (and, in states have been able to "double dip" by transferring the existing payment from their localities to the state, some cases 1974 or 1975 rates-see Table 23, thereby eliminating the practical effect of the replace- footnotes 4 and 5) were then applied to the ment provisions. open" (urban and nonurban) properties alike. * enact a comprehensive property tax equivalen- This strategy is consistent in principle with cy PILOT on only "nonopen space" proper- that recommended by the Public Land Law Re- ties-that is, on the tax base detailed in Chap- view commission and the same as that recom- ter 3. This approach would mean taking a mended by the U.S. General Accounting Of- "hands-off" policy with respect to those pay- fice.=According to Table 24, the gross cost of a ment programs already in place for the open- full tax equivalency PILOT applied to all U.S. space (lands) programs enumerated in Tables 1 real properties would be approximately $4.85 and 2 of Chapter 2. Thus, current payment pro- billion if an average U.S. effective rate of 1.74% grams targeted to properties identified by the were employed. Thus, by elminating the $2.04 following usage categories would be main- billion in current payments, the net cost to the tained (i.e., would not be included in a tax- U.S. Treasury from adopting this first replace- equivalency PILOT base): grasslands, grazing, ment strategy would be $2.81 billion. forest and wildlife, reclamation and irrigation, A second replacement strategy would be to mineral leasing, and national parks. Any replace only those current payment programs nonproperty-related PILOTS, including (but that are designed as compensation for real not prospectively limited to) existing excise tax property taxes foregone. Under this strategy, and land sales receipts-sharing programs, and the following types of programs would not be the federal payment to the District of Columbia, replaced or eliminated: those relating to De- would also be maintained. Thus, under this partment of Interior land sales, excise tax third strategy, the following programs are re- sharing from federal sales of sport fishing placed with a tax equivalency PILOT: equipment and from firearms and archery 1978 equipment and supplies; the annual "federal Amount government payment" to the District of Colum- Programs to be Eliminated ($000) bia; and growth impact grants such as those Oregon and California made for those State of Washington counties Grant Lands experiencing increased infrastructure costs re- Boulder Canyon Project sulting from the buildups of the Trident sub- Colorado River Dam Fund marine bases ($11 million). * * The extra cost of Columbia Basin Project Trinity River Project not including these nonproperty tax-related Federal Impact Aid programs is small, relative to total net costs; (for education) however, the principle to be maintained by not HUD Public Housing replacing nonproperty-based payments is an Authority important one, viz, a recognition that the real HUD Payments on Foreclosures property base is not the only source of erosion St. Lawrence Seaway Act of the statellocal revenue system (see Chapter 2 Veterans Administration discussion). Foreclosures The third replacement strategy (essentially TVA Mitigation Payments that recommended by the ACIR) would be to Atomic Energy Commission

Norris City, TN, Payments (TVA) *Because of their nontax (or in lieu of tax) nature, the annual federal payment to the District of Columbia, in-kind payments of an administrative nature, loan Total Replacement Savings $ 985,945 guarantees and the like are not considered proper can- didates for replacement under any of these three strat- NOTE: Data are for 1978. Total replacement savings in egies. 1979 equaled $989,428 (including Norris City * *Included in this "open space" category as a non- funding, which commenced in that year). replacement item is $116 million in Community Ener- gy Impact Funds (CEIF) made available in response to Using this strategy, the net cost of the PILOT offshore energy facility impacts. These CEIF payments are considered in the nonreplacement category be- is approximately $2.67 billion (1978). cause their legislative intent was to provide for an in Clearly, if any one of these replacement strat- lieu property tax payment, a rationale that is accepted egies is adopted, there will be some jurisdic- here but which seems rather questionable -particularly since $110 million of this is in the form tions which, on balance, lose federal dollars. A of a loan guarantee. few jurisdictions may find that the amount of education impact aid they receive-the single ject to negotiation. The PILOT proposed here, largest program to be replaced-is greater than however, would exhibit the same general mag- its PILOT entitlement. nitude of revenue elasticity as the real property However, the vast majority of states and tax. Second, and obviously most important, is localities will be net gainers under any replace- the simple arithmetic, which shows that in the ment, for two reasons. First, many of the cur- aggregate the PILOT will add federal dollars to rent PILOTS being replaced are flat sums sub- statellocal treasuries.

Heath and Co., 1979, Table 4-1, p. 83. Gold argues FOOTNOTES that such homeowner preferences are a backdoor-form 'Advisory Commission on Intergovernmental Rela- of classification. tions. Significont Features of Fiscal Federalism, 41bid., pp. 13 and 21, and Significant Features, 1978-79 Edition, M-115, Washington, DC, U.S. Gov- 1978-79, op. cit., pp. 45 and 52. ernment Printing Office, 1979, Tables 28, 33, pp. One Third of the Nation's Land, op. cit., Chapter 14. The 44-45. 52-53. commission also recommends a public benefits discount ZACIR, Significant Features, 1978-79, op. cit., p. 63. of at least 10% but not more than 40%. Also, U.S. General 'For complete discussion of these issues, see Steven Accounting Office. Alternatives For Achieving Greater David Gold, Property Tax Relief, Lexington, MA, D.C. Equities, op. cit.

OnJune 19, 1980, the Advisory Commission on Intergovernmental Relations held a public hearing on payments in lieu of taxes. The names and formal statements of the witnesses who testified follows. D.H. Clark, Assistant Director, Federal- Provincial Relations Division, Depart- ment of Finance, Government of Canada. Charles M. Stephenson, formerly Chief, Government Research Division, Tennes- see Valley Authority. Robert W. Rafuse, Jr., Deputy Assistant Secretary for State and Local Finance, U.S. Department of the Treasury. Kenneth W. Hunter, Senior Associate Di- rector, Program Analysis Division, U.S. General Accounting Office. Richard J. Davis, Mayor of Portsmouth, VA. Jerry K. Emrich, County Attorney for Arlington County, VA. STATEMENT OF miscellaneous, small, property taxes but no personal property tax. D.H. Clark, The largest property owner in Canada is the ASSISTANT DIRECTOR, FEDERAL- federal government. However, the federal gov- PROVINCIAL RELATIONS DIVISION, ernment's holdings appear to be somewhat DEPARTMENT OF FINANCE, less, in relative terms, than those of the United GOVERNMENT OF CANADA States government because the public domain in Canada belongs to the provinces rather than the national government, and because our de- 1 have been asked to provide the Commission fence properties, while important, are obvious- with a description of the Canadian system of ly of less significance than those of the United grants in lieu of property taxes. It is an honour States. and privilege for me to be asked to do this. The Property belonging to the Government of remarks which I make are personal and should Canada, and to provincial goverments as well, not be attributed to the Government of Canada. is exempt from taxation by virtue of a specific The property tax in Canada fulfills a function and very clearly worded provision of the Cana- closely similar to that of the property tax in the dian Constitution, which states that "No lands United States. That is to say it is the mainstay or property belonging to Canada or any prov- of local government, and is the prime source of ince shall be liable to taxation." However, the financing municipal and school services- government of Canada began making payments along with grants from provincial govern- in lieu of property taxes in 1950, with the pres- ments. ent legislation having last been amended in The property tax is presently the fourth 1957. To my knowledge, it was the first juris- largest tax levied by governments of all levels diction in North America to do so. However, in Canada, exceeded only by the personal in- we were preceded by the United Kingdom in come tax, corporation income tax, and general 1874 and, possibly, by other countries as well. sales tax. In 1980 it will yield close to $10 bil- I would like to describe how the federal lion, in an economy that is about one-tenth as grant system works and then make some com- large as that of the United States. Of this ments about the rationale which underlies amount, over 98% will go to local government these payments. I will focus on grants in lieu of and less than 2% to provinces. The provinces the real property tax as this is much the most control the property tax and have established a important property tax in Canada. In so doing, very strong system. As one example of this, I will make some references to legislation that there are almost no special property tax con- is presently before the Parliament of Canada, cessions for private industry in the whole known as Bill C-4-the- "Municipal Grants Act, country. 1980" which, if approved, will enlarge and The property tax accounts for approximately update the program. 75% of total local government revenues from The Canadian system is based upon the con- own sources. While I refer to the property tax cept of full tax equivalency. That is to say, in the singular, this is actually a family of taxes while the payments are grants, they are intend- which are all related to real property. Approxi- ed to be the same in amount as if they were ac- mately 85% of total property tax revenue in tual tax payments. Equivalency is achieved by Canada comes from the well-known real prop- two simple steps. First, federal property is to erty tax, an annual levy on owners of real prop- be valued as if it were taxable property. Sec- erty. The balance comes mainly from the busi- ond, the rate of tax to be applied to the value of ness occupancy tax, which is a tax levied on federal property to calculate a grant, is to be the occupant of property used for business pur- the rate of tax that would be applicable to fed- poses. The latter tax accounts for approximate- eral property if it were taxable property. There ly one-eighth of total property tax revenues, are a few exceptions to these simple concepts and appears to be a rather unique Canadian but they will be effectively removed by Bill contribution to the property tax family. We also C-4. have local improvement taxes and a number of The properties in respect of which grants are paid are defined in the Municipal Grants Act. grants in lieu of real property taxes on diplo- In other words, the government has not provid- matic and consular properties of foreign gov- ed that it would pay grants in respect of any ernments. As a consequence, Bill C-4 will re- property that would be taxable if it were pri- sult in a comprehensive system of grants in vately owned. The properties in respect of lieu of taxes which will be approaching $300 which grants are now paid include office million a year. buildings, post offices, defence properties of Responsibility for administering grants on all kinds in urban areas, defence housing ac- departmental properties was recently trans- commodation and land in rural areas, research ferred to the Department of Public Works from laboratories, airports, penitentiaries, experi- the Department of Finance. Public Works is re- mental farms, warehouses, marine properties, sponsible for managing much of Canada's real training schools, veterans' hospitals, customs property holdings. The grant program is pres- stations, police detachments, and vacant land. ently administered by a staff of 29, of whom 16 Some of the properties on which grants are are professional real property assessors. Their paid-such as hospitals and schools-are nor- task is to examine the values of federal proper- mally tax exempt when owned by someone ty placed by local assessors, with a view to es- other than the federal government. tablishing that it has been valued "as if it were Bill C-4 will bring a number of categories of taxable property," as required by the federal property into the grant system for the first act. This is the key element of the administra- time. This will include national parks, defence tive process. buildings in rural areas that are now excluded, It sometimes happens that there are differ- the Parliament Buildings, museums, libraries, ences of opinion concerning the value of prop- art galleries, concert halls, conservation proj- erty that is subject to grant. Where this occurs, ects, and reclaimed lands. discussions take place between federal and As a result of these changes, grants will be local assessors with a view to resolving the dif- paid on all federal real property holdings other ferences. Usually differences can be resolved, than structures, Indian reserves, and urban but where this cannot be done, the federal gov- park lands. This is a very short list of exclu- ernment reserves the right to establish its own sions. However, the exclusion of structures re- values. Some of the properties which have to moves from the grant system such items as be valued are, of course, very complex and it docks, piers, breakwaters, jetties, storage tanks, may be impossible to find comparable taxable canal locks, and aircraft runways and is a sig- properties to be used as a guideline for arriving nificant limitation because many of these at value. In such instances, it is necessary to as- items are taxed in some jurisdictions. certain the average level of assessment for taxa- Some of the properties are to be brought into ble property of a comparable category. I can as- the grant system gradually, by a phase-in proc- sure you that the valuation problems, while ess, which I would strongly recommend to oth- difficult, are manageable. er jurisdictions that are interested in It is fair to say that the federal program of introducing a system of grants in lieu of taxes. grants in lieu of taxes has enjoyed considerable In the case of Bill C-4 the government is using success over the 30 years that it has been in op- a four-year phase-in for major new inclusions eration. Few programs have lasted as long and in the grant system, such as national parks. it appears to be a permanent element of The total cost of the matured grant system at intergovernmental relationships in Canada. the end of the four-year phase-in period, in Nine of the ten provinces have followed the terms of 1980 dollars, will be approximately federal example and pay grants in lieu of taxes $175 million. Payments are made to more than on their own properties. In 1980, for the first half of Canada's 4,200 municipalities. These time, the grants paid by the provinces collec- numbers refer to the properties of government tively will exceed those paid by the federal departments. A further amount of at least $110 government. The increase in provincial grants million is presently paid by federal corpora- is largely attributable to a spectacular expan- tions, or Crown corporations, as we call them. sion of the grant system by the Province of In addition, there is in place a system of federal Quebec through legislation enacted in Decem- ber 1979. This legislation removes virtually all amount of payments is determined automati- restrictions on Quebec's grant system, and cally by a formula. While the grant can go up therefore goes beyond what the federal govern- sharply in any given year if city council makes ment will do even with the recently proposed a sharp increase in its tax rate, this can only be enlargement. done if private citizens are subject to the same The bill, which is now before the Parliament rate of tax increase. of Canada, indicates the broad degree of sup- This brings me to the rationale for the grant port in Canada for a system of grants in lieu of system. In a fundamental sense, the rationale taxes. The bill received second reading in the for paying grants is that federal property in House of Commons on May 20, and 15 mem- Canada receives very valuable services from lo- bers of Parliament, from all three parties, repre- cal government. Hence, in a broad sense, it is sented in the House, participated in the debate. the benefits-received principle. It is not the There was no criticism of the principle of hav- ability to pay principle which, in my view, ing the government pay grants in lieu of taxes. cannot appropriately be applied to govern- However, a number of speakers expressed re- ments. The principle of benefits received gret that the measure could not go even further would be less important if federal property so as to remove remaining restrictions on the were uniformly distributed about the country grant program. These restrictions relate to the but, of course, this is not the case. nonpayment of grants on structures and urban While benefits received is the basic rationale park lands, the exclusion of business occupan- for a system of grants in lieu of taxes, it cannot cy taxes from the grant system, the lack of an be applied to properties on an individual basis. appeals procedure, and the nonpayment of in- Theoretically, this might be possible; but a pro- terest where grants are paid after tax due dates. gram based upon this concept would be diffi- Before turning to the rationale behind our cult to administer, a source of endless contro- grant system, I would like to note two related versy, and would lack public credibility. As a aspects of the program. First, the payments are consequence, we are forced to the conclusion unconditional. That is to say there are no con- that benefits received can apply only in an ag- ditions imposed on the grant-receiving bodies. gregate sense. For individual properties, we Second, the payments apply to the City of Otta- must fall back upon the principle that a gov- wa, which is the national capital, and provide ernment should put itself in the position of an the only important, regular means of federal fi- owner of private property. This principle has nancial support for that city. This greatly gained an extraordinary degree of acceptance simplifies relations between the national gov- within Canada. This principle emphatically re- ernment and the national capital and is clearly jects the notion that a federal government, or in sharp contrast to my understanding of the anyone else, warrants tax exemption on the situation which prevails in Washington, D C grounds that it brings particular benefits to a At the federal end, our grant to Ottawa is ad- municipality when it locates there. I, personal- ministered, in a typical year, by the equivalent ly, find such a notion repugnant because, if of about two person-years, and I would think you think about it, it clearly implies that a mil- that there is a similar involvement on the part lionaire should be exempt from property tax on of the city-including the assessment staff his residence. who, in this case, are employees of the Prov- The principle that government should put it- ince of Ontario. self in the position of a private taxpayer can be This method of support for the City of Otta- applied in full-to all properties and all types wa not only has the virtue of simplicity but of property tax-or, as the federal government also of certainty. By certainty, I mean that the has done, to a wide range of properties, and to City of Ottawa usually knows, within a margin most types of property tax. of less than 1%, what its federal grant will be, Finally, there are two other important ration- and it knows this at the beginning of its fiscal ales for a system of grants in lieu of taxes. First, year as soon as it has struck its tax rate. This a system of grants in lieu of taxes embraces the has proved to be a good arrangement for the concept of neutrality between the public and federal government as well, because the private sectors of the economy, and inhibits undue expansion of property ownership by the which is the property tax institution. We all public sector by raising the cost of ownership know that one tax exemption begets another, so that it is comparable to private sector cost. It and leads to a vicious cycle of tax base erosion. also achieves neutrality within the public sec- A system of grants in lieu of taxes is a strong tor in respect of the choice between owning and high profile step in the opposite direction. and leasing real property. A strengthened property tax will, of course, Second, a system of grants in lieu of taxes strengthen an even more available institution, will strengthen a valuable national asset, that of local government itself.

STATEMENT OF thority in 1934, and immediately started work on research concerning the growing tax loss Charles M. Stephenson, problems and state-local governmental relationships faced by that agency as reservoir FORMERLY CHIEF, GOVERNMENT lands and electric utility properties were being RESEARCH STAFF, TENNESSEE acquired and removed from the tax base. I par- VALLEY AUTHORITY ticipated in drafting the amendment of Section 13 of the TVA Act, which was passed in 1940 and established a new basis for TVA payments in lieu of taxes on its power properties and op- 1 appreciate the opportunity to appear before erations. I then supervised the administration you today. of TVA payments from fiscal year 1941 to 1975, when I retired from the position of Chief of the Introduction Government Research Staff in TVA. Either as a TVA representative or, since I think that the ACIR staff has done a superb 1975, as a sometime consultant to ACIR, I have job in preparing the report under discussion at had a part in every significant study of the this hearing. It is comprehensive; it analyzes problem of federal tax immunity and payments the present problems clearly; and it sets out the on federal property since World War 11, except- pros and cons of possible alternatives with ing only the GAO report of 1979. These have careful consideration. Now you have the task of included the Hoover Commission studies; the formulating the Commission's policy position, Bureau of the Budget study of the early 1950s; and deciding upon official recommendations the Kestnbaum Commission reports of the mid- for action. dle 1950s; the Public Land Law Review Com- Whatever weight you might give to my views mission report of 1970; the 1978 ACIR report and opinions in this regard must depend, I be- (A-68) relating to open-space lands; and the lieve, on your assessment of my qualifications present study of nonopen space federal real for reaching my own judgments and recom- properties. (These several reports are more par- mendations. Hence, with your indulgence, I ticularly identified and summarized in the shall briefly review my professional back- ACIR staff study under consideration here.) ground and experience which form the basis Moreover, I have carefully read every one of for rather strongly held opinions, to be ex- the reports just referred to; and I daresay that I pressed later. am as familiar with the extant literature on this subject as any person around. The reason for Background this specialization is that it has literally been part of my lifework as a professional in govern- I was trained in public finance and taxation ment service. Thus I speak from long observa- at the University of Kentucky graduate school tion and experience both as a researcher and as under the distinguished Professor, James W. a TVA administrator. Martin. When I first began the study of federal tax I joined the fledgling Tennessee Valley Au- immunity and payments on federal properties some 45 years ago, the matter was analogous to about the lawyer's proper role.) Too often, in a cloud on the horizon no bigger than a man's my view, the lawyer in government makes hand. But then came World War 11. And when rather than advises on policy. we in TVA prepared and submitted to the Con- gress in 1944 a report on Section 13 of the TVA The Basis for Policy Formulation Act and thereunder during the first four years of operations following passage of If I have learned anything of value from my long experience of working in the vineyards of the 1940 amendment, federal property owner- government, it is that the validity of theoretical ship and activities had been greatly expanded (and were still growing rapidly), and tax loss underpinning is crucial to the soundness of any public policy and governmental action. problems had intensified. This wartime change Faulty rationale and an illogical conceptual was reflected in TVA then; and postwar devel- framework can only lead to questionable policy opments have been even more significant and unsatisfactory operating results in the long throughout the federal government. run. While conditions can change and new Sometime in the 1950s, recognizing that the thinking may eventually point the way towards TVA system of payments no longer fitted the policy revision, each step of policy formulation new circumstances that had developed since and action along the route should be predi- the payment statute was revised in 1940, I pre- cated upon the soundest possible base apparent pared a brief analysis of the situation, includ- at the particular time. ing possible approaches towards improvement, The mere greasing of squeaky wheels is not, and proposed that a careful study of the matter in my view, a proper basis for governmental be undertaken by TVA. My modest proposal policy. Yet, the recent proliferation of ad hoc was blocked by higher level administrators and payments by various departments and agencies lawyers in TVA. Later on, as actors changed in is a manifestation of just that expedient ap- the TVA hierarchy and the climate appeared proach to the problem of federal tax immunity. more hopeful of success, I renewed my sugges- In one case that has come to my attention, a tion from time to time but it was always turned federal agency has entered into an agreement down. (I should point out there that the TVA with a state whereby the state has promised to Board never had an opportunity to consider return its payment in lieu of taxes-legally due and decide on this matter. Under TVA proce- under present statutory provisions-in ex- dures-as is common in government circles change for a larger payment, equivalent to real -such proposal had to be submitted upwards taxes on a private enterprise, to be channeled through administrative channels after internal through a third-party operations contractor act- staff coordination, and the cutoff could operate ing on behalf of the federal entity. Such offbeat anywhere along the line.) arrangements are likely to increase as state and I think that this experience within TVA is local officials come to realize the strength of typical of federal departments and agencies. their bargaining position in the face of federal Responsible high-level officials generally pre- agency efforts to secure desired benefits from fer to cope with existing problems as best they the states and localities. State and local control can, rather than opt for change and fly to possi- over certain types of regulatory authority and ble ills they know not of. Thus it is hard for a many public services gives them a strong hand government agency to anticipate developing in such negotiations-and they are learning to problems and try to forestall them if it might use this newfound clout. require statutory changes. The don't-rock-the- boat syndrome is very compelling, and positive The Choice of Policy action usually occurs only in response to overwhelming pressures from outside. Incidentally, I come now to the heart of the problem now I think that lawyers in the government service faced by this Commission; namely, the choice wield an overly strong influence in this of policy for determining recommendations for regard-and I make this comment despite the action. Once the policy questions are decided, fact that I have many lawyer friends, and even the approriate recommendations will follow al- a lawyer daughter. (We argue good naturedly most as a matter of course. What are the real policy alternatives for the of 1970 and the recent GAO report recom- "tax" treatment of federal owned nonopen mended the tax equivalency approach for pay- space properties? The staff report has explored ments on federal property. While it is true that these various possibilities in ample detail. Suf- these studies were concerned primarily with fice it to say now that, broadly speaking, the is- the treatment of federally owned open-space sue boils down to a choice between two lands, the arguments they advanced in support alternatives: either change to a general system of such policy are even more compelling, I be- of tax equivalency for federal properties, or lieve, when applied to urban-type properties. continue with the hodgepodge of payments I note also that the PLLRC equivocated some- represented by the status quo. what in taking its stand, in contrast to GAO's The detailed arguments for and against each more forthright position; but I ascribe the for- of these alternatives have been clearly set out mer Commission's hesitancy to the political in the staff report and need not be repeated temper of the times in conjunction with its here. But, in my opinion, this decision cannot concern for the problem of administrative fea- be founded upon purely objective criteria. The sibility. However, conditions have changed final choice must rest, in a sense, upon a value over the last ten years, and state-local property judgment which is essentially political in char- tax administration has greatly improved-as acter. Which policy is the simplest, the most shown by ACIR's own studies. Therefore, the equitable, and also feasible of administration? GAO indicated no qualms over the matter of (I note here that "simplest" is not the same as administrative feasibility of a system of tax simplistic, which, in my thinking, is closer to equivalency payments for federal half-baked .) properties-and I share their confidence on From the-standpoint of simplicity and this score. understandability, tax equivalency has the Looking now at the findings and conclusions great advantage of being closest to the general of the ACIR report before us, I agree fully that system of ad valorem taxation-one of the ". . . the appropriate federal policy response [to oldest types of taxes, and still the greatest reve- the unsatisfactory status quo] would be to au- nue producer for the state and local govern- thorize either direct local taxation of federally ments in the U.S. (I do not advocate outright owned and used real property or enact a uni- abrogation of the principle of federal property form system of payments in lieu of taxes based tax immunity-mainly for political reasons.) on full tax equivalency." (Draft Report, p. 41.) Given that the revenue loss problem under consideration has its roots in the immunity of Time For Action federal property from state and local taxation; then it seems to me that the obvious remedy is Mr. Chairman, I feel that the time has come for the federal government to make payments for definitive action on this long festering on its property equivalent in amount to what problem of intergovernmental relations. The the actual taxes might otherwise be except for matter has been thoroughly studied. One might the legal doctrine of intergovernmental tax im- say that it has almost been studied to death. munity. There is no need for more analysis or gathering In terms of equal treatment of like properties of additional information. What is called for similarly situated, tax equivalency is the only now is for those in responsible positions in approach which seems to fill the bill in the government, including this Commission, the context of the ubiquitous general property tax. executive Administration, and the Congress, to An in lieu payment system based upon other screw up their political courage and say, in ef- methods of determination inevitably leads to fect, "This is the way to go." erratic results hard to justify on grounds of eq- The risk of bureaucratic procrastination is uitable treatment, whether from the property perhaps illustrated by the case of the National standpoint or that of the recipient units of gov- Forest revenue sharing payments. After long ernment. years of complaint by county officials, the For- It should be remembered that both the Public est Service finally arranged in 1975 for a study Land Law Review Commission (PLLRC) report of the problem by ACIR. (Later the study was broadened to cover all open-space lands held by the federal government.) But by 1976 the pressures by the National Association of Coun- In conclusion, I believe the time has finally ties and others on the Congress had become come for action on the problem of tax immuni- overwhelming; and the Payments in Lieu of ty of federal urban-type properties. The matter Taxes Act of 1976 (P.L. 94-565), establishing a has been amply researched; adequate informa- new system of payments for nearly all federal tion has been assembled; alternative policies open-space lands, was passed before ACIR have been fully analyzed; and now the hard could finish its study. Consequently, the previ- policy decision must be made. Do we or don't ous hodgepodge of revenue sharing payments we opt for a sensible and broad coverage sys- was made even more complex by over-layering tem of tax equivalency payments in place of with a new system of per acre payments, the confused, hit-or-miss conglomeration of modified by offsetting credits, minimums, and payments and exemptions now prevailing? I maximums. It is little wonder that the GAO last strongly urge the desirability of order and con- year found the combined system to be virtually sistency. I hope you will agree with that view, impossible of accurate and equitable adminis- and that you will recommend appropriate leg- tration. islative action to achieve it.

STATEMENT OF tions are persuasive arguments only in the ab- stract. In the instant case, they would be con- clusive only in an ideal world, one in which, Robert W. Rafuse, Jr. for example, all real property-regardless of ownership-were subject to taxation on an DEPUTY ASSISTANT SECRETARY FOR equivalent basis, and other flows of funds, ex- STATE AND LOCAL FINANCE, emptions, and immunities were not major fea- U.S. DEPARTMENT OF THE TREASURY tures of our intergovernmental fiscal system. Unfortunately, we do not live in an ideal world. The world of 1980 is one characterized by This ACIR study is the most thorough and myriad deviations from the ideal: comprehensive treatment of the immunity of an extraordinarily complex set of lexemp- federal real property from state and local taxa- tions from taxation of numerous types of tion that has yet been performed. Its attempt to real property; exemptions that vary sig- present a balanced view is impressive, and it nificantly from state to state and locality breaks new ground, particularly with respect to to locality within states; the inventory of federal real property and in its many forms of state and local immunities attempt to develop ways of evaluating federal from federal taxation; property. I compliment the authors on an ex- deductibility from federal income taxes of cellent effort. a number of types of private tax pay- Considerations of both equity and efficiency ments to state and local governments; argue for the undesirability of the federal im- the exceptional variety of federal grant- munity, given the predominant role of the real in-aid payments to state and local gov- property tax in local government finance. ernments for purposes ranging from the These considerations argue for the taxability of sublime to the trivial; and all real property, including federal, state, and a complex of 57 ad hoc federal programs all types of private property. They are the same that pay as much as $2 billion in one considerations that argue for the inclusion of form or another of compensation to state all types of consumption expenditures in the and local governments for the immunity base of a sales tax, and for a true "accretion" of federal property from taxation. concept as the base of an income tax. However, equity and efficiency considera- In such a world, concepts of equity and efficiency can offer important guidance on the di- even ask how-in an age when policy is never rections of desirable change. But they cannot made out of the sight of the computer print- be presumed to dominate all other considera- out-the Congress could be expected to ap- tions. Decisions on the desirability of a pay- prove either of the report's policy options on ment in lieu of taxes system or termination of the immunity issue in the absence of anything the immunity of federal property cannot be approximating estimates of the distribution of reached independently of the overall current the gains and losses from whatever package of state of the intergovernmental fiscal system in policy changes might be proposed. the United States. Even if the desirability of a PILOT were to be The equity argument, for example, suggests conceded, such a program could prove exceed- that the federal government should be contrib- ingly difficult and costly to administer. The uting to the payment of the costs of local and magnitude of the problem of evaluating federal state government on a par with the contribu- property is staggering. Even with the contributions of the private sector, as measured by the tion the ACIR's study makes to developing market value of real property owned-to the current value estimates, major inequities are extent that real property is the only or predom- likely to result to the potential detriment of inant measure of an appropriate contribution. the federal taxpayer. In fact, it may be on Can anyone doubt, howevet, that the federal administrative grounds that the recommenda- government's contribution of unrestricted tion for a PILOT is most vulnerable, at least funds to the support of state and local govern- from the federal government's point of view. ments under the revenue sharing program To the extent that a property tax is based alone ($6.85 billion per year) sxceeds its poten- on the value of the property, which re- tial liability for property taxes (estimated in the flects the capitalization of an implicit or Commission's study at $3.7 billion per year)? explicit stream of earnings, the proper- The overall magnitude of the contribution ty's use and, therefore, its value is re- cannot obscure the fact that revenue sharing is flected in its market price in the private paid only to general-purpose governments, and sector. As a public facility, its current that other discrepancies between the locations market value or price reflects its poten- of property values and allocation of revenue tial use in the private sector, but general- sharing no doubt exist. The point may be made ly not in the public sector. Appropriate in the most practical possible terms, however, assessment, either by the federal govern- by asking whether state and local governments, ment or by local assessors, would gener- as a group, would swap $3.7 billion in ally not be impossible, but enough cases revenue sharing payments for termination of of problems would remain to plague the the federal tax immunity and the panoply of ad assessors. hoc compensation programs. The hard reality is that we do not know how While much progress has been made, the distribution of federal real property values many states and localities still have a compares with the allocation of revenue- long way to go in developing practical sharing payments, or how either compares and acceptable methods of evaluating with the overall incidence of federal grant-in- their own structures and land, much less aid payments to state and local governments, to those of the federal government. State say nothing of the incidence of other tax immu- oversight of local property tax adminis- nities, exemptions, and deductions. How, then, tration is not yet adequate, despite major can we be sure that, from the perspective of advances in recent decades. The result some global equity concept, the adoption of a could be extensive litigation and appeals, single system of in lieu payments or termina- based on major differentials in evaluation tion of the tax immunity of federal property from locality to locality, and from state to would produce a more equitable distribution of state. federal payments to state and local govern- The potential bureaucratic and adjudica- ments? tion problems arising from local assess- On an even more practical note, one might ment of federal real property must be viewed as both complex and substantial, in GSA practices are almost surely in order. and almost surely not worth the trouble, The report notes that "no state provides for a given the marginal dollar increase in fed- comprehensive approach to the immunity eral payments that might result. issue." Is this not an ideal candidate for state pioneering of an innovation in intergovern- In conclusion, I am opposed to a federal PI- mental fiscal relations? I would urge the Com- LOT program and termination of immunity on mission to focus its recommendations in this the basis of the above conceptual, budgetary, area on state policy-to recommend that at and administrative grounds. While the ACIR least one state adopt a comprehensive policy of study is a major contribution to the discussion the sort comprehended in the draft recommen- of the matter, it does not conclusively resolve dations for the federal government. Many of many major issues and problems. the practical, administrative issues could be I have no problem with the recommendation thoroughly explored in a state effort, and the for improving the federal inventory of real lessons learned could be invaluable in the de- property regarding current value, consistent re- sign of an appropriate federal policy should the porting requirements among agencies, and im- time for the idea ever arrive. proved recordkeeping, if the additional cost In this connection, I am perplexed by the would be reasonable. However, if the primary draft recommendation that the Congress "au- rationale for changes in existing procedures is thorize" a system of federal in lieu payments or the establishment of PILOT, these changes may taxation of federal property, but that "each not be necessary. The General Services Admin- state examine its own real property tax immu- istration already has extensive detailed infor- nity and consider authorizing a program . . . ." mation on federal real property, though it is This strikes me as a cart-before-the-horse situa- imperfect in the many respects noted in the re- tion. I do not understand why the states should port. The ACIR findings do not necessarily re- not be called upon to undertake the initial quire the recommended changes unless, or un- innovating and the federal government to do til, a PILOT program is enacted. To the extent the examining and considering, based on the that the ACIR's recommendations will contrib- results of the state experience, in the spirit of ute to improved policy decisions regarding the that process of innovation that is such a vener- uses of federal real property, however, changes able tradition in our federal system.

STATEMENT OF Results of Existing Land Payment Programs Kenneth W. Hunter A variety of land payment programs have SENIOR ASSOCIATE DIRECTOR, evolved over the years to compensate states PROGRAM ANALYSIS DIVISION, and counties for the tax exemption of federal US. GENERAL ACCOUNTING OFFICE land within their jurisdiction. We reviewed the operations and results of 11 programs that cover about 760 million acres and made $610 million in payments in fiscal year 1978. Our 1 am pleased to appear before you today to dis- field studies were conducted in eight western cuss our work on land payment programs. I states where about 8O0lO of the payments were will summarize the information presented in made. our report "Alternatives for Achieving Greater We examined the combined results of these Equities in Federal Land Payment Programs" 11 programs in order to assess the reasonable- (PAD-79-64 dated September 25, 1979) and ness of their compensation. Ten of the pro- then comment briefly on your Commission's grams are designed to share the federal receipts study. from timber sales, mineral leases, and grazing fees. Public Law 94-565, the 11th and newest of case in most of the states covered by our these programs, was enacted to compensate review. Thus, while states and county counties from appropriated funds that were governments in these states lost nothing considered to be inadequately compensated in oil and mineral taxes from leasehold- under existing receipt-sharing programs. To ers, they also received 50% of federal minimize overcompensation, however, the mineral royalty receipts and at least a act's payment hrmula provides that maximum minimum payment under P.L. 94-565. acreage payments will be reduced by selected Third, the states can influence the size of receipt-sharing payments that are received by the payments to their counties under P.L. the local governments under the other ten fed- 94-565 by the way they distribute the re- eral programs. Thus these 11 programs are now ceipts they receive under the other pro- interrelated through the P.L. 94-565 program. grams. The P.L. 94-565 payments are re- We found many inequities and inconsisten- duced by only the receipts passed cies in the operations and results of these 11 through directly to the counties; if they programs. are passed to an independent school district or used by the state to provide ser- First, although the basic aim in enacting vices to the counties, they need not be these programs was to compensate states deducted. There is no consistency among and counties for lost tax revenues and the states in the proportion of payments economic burdens of tax exempt federal which are passed directly to counties and land, as the programs have been de- .are therefore deducted in computing P.L. signed and implemented they pay states 94-565 payments. In the eight states we and counties a percentage of the annual reviewed, for example, the amount of federal receipts generated by the land receipt-sharing payments passed through rather than equivalent taxes that would to counties varied from 3% in Nevada, have been paid if the land were privately New Mexico, and Utah to 75% in Oregon. owned. For six states and their counties, Fourth, administrative problems in deal- for which we were able to make a coming with 11 programs and several thou- parison, we estimated that in 1978 they sand political entities have also added to received $213 million in federal land the inequities and inconsistencies. The payments which was $187 million, or particular problems include inaccurate about 87% more than they would have re- state reports on receipt distribution, inac- ceived on a tax equivalency basis. curate acreage data from federal agen- Second, since each program has its own cies, initial uncertainty about the deduc- percentage for receipt-sharing, ranging tion of payments to independent school from 5% to 90%, and there are variations districts, and difficulty in making correc- in land productivity, some local govern- tions for erroneous payments in prior ments received large payments while years. others received little or no payment. For example, under the mineral royalty pro- In view of these problems with the existing gram, states and counties can receive programs, we analyzed alternative approaches. both federal payments and taxes. The I have attached to my statement a table from federal government rebates 50% of the to- our recent report which outlines the criteria we tal mineral royalty revenues to the state used, the options we evaluated, and the results (Alaska receives 90%) where the public of our analysis. lands generating the revenue are located. Based on our findings regarding the existing Notwithstanding these royalty payments, programs and the analysis of alternatives, we the leaseholders often pay the same have recommended that the Congress use tax states severance and county property equivalency as a basis for these land payments. taxes on their oil and mining operations, We also recommended the elimination of the the same as they would pay if the opera- permanent authority to automatically use the tions were on private lands. This was the federal receipts generated by these programs, EVALUATING FEDERAL LAND PAYMENT OPTIONS

Tax Fee Per Receipt- Receipt- Fee for Fiscal Im- Imposed Comparable Equivalency ACR Sharing Sharing Sewice pact of Fed- Expenditures Tax Burden Plus Fee Per era1 Owner- Acre ship

. Legislative Requirements a. Plan related to program Yes IN0 No Somewhat Somewhat Yes Yes intent? 1 1 I I b. Congressional intent Moderately diffi- Very easy Yes Needs careful Needs careful Very difficult Very difficult Very difficult clear? wording wording

'. Uniformity -I- Yes Dependsupon a. Payments determined uniformly? payment schedule b. Consistent principles and Yes procedures?

I. Congressional Control Receipt, a. Budgetary control Depends upon Yes sharing, no; Probably not I Probably maintained? ------implementation ------. ------fee, yes implementation b. Manipulation of payments I Depends upon Probably not possible? implementation implementation

1. 1. Federal Administrative Requlrements a. Data available on time? C------Yes Yes b. Audit authority identified' Yes Yes + .------Very easy and c. Economical and easy to Probably costly administer? economical to administer i. Recipient's Administrative Requirements

a. Advance payment Very likely Yes estimates provided? b. Payments timely? Yes 1 Yes

c. Payments stable? Depends upon Yes stability of taxes

SOURCE: U.S. General Accounting Office, Alternatives for Achieving Greater Equities in Federal Land Payment Programs, PAD-79-641, Washington, DC, U.S. General Accounting Office, p. 48, Table 10. the setting of expiration dates for each pro- roads, bridges and tunnels, railroads, and gram, and the setting of distribution totals more. through periodic appropriations action. We Your staff study on "open space" federal recognize that it would be very difficult for the land concludes that the payment methods states and counties if these payments were. should continue as is-in short, that these eliminated all at once; therefore, we recom- lands not be put on a tax equivalency basis. We mended a phasing out of the programs over came to the opposite conclusion. several years. Your staff study on "nonopen space" real In reaching our conclusions, we gave empha- property concludes that tax equivalency is the& sis to the need for standards for measuring a preferred basis for all such property. Since we program's effectiveness and equity. Therefore, have not made a detailed study of these pro- we were particularly concerned with the rela- grams, we are not in a position to comment ex- tionship between the program's intent and the cept in very general terms. Nor are we able to payment method. Our views on these relation- use the analysis we made of open-space land to ships are presented in the following table. automatically conclude that tax equivalency should be used for all classes of real property. If the program rationale is, then the payment method In fact we may very well reach different con- should be clusions for some classes. There are several fac- The tax immunity of feder- Tax equivalency tors that we would want to consider further: al lands A business partnership be- Receipt sharing tween federal government First, the open space federal land is being and states and local gov- used or could be used for the same com- ernments mercial purposes as the adjacent private- To reimburse local govern- Fee for services ly owned land-grazing, timber, and ments for the added costs mineral extraction. Since the uses or po- incurred To offset fiscal impact An estimate of fiscal im- tential uses are the same, the basis for pact or imposed costs determining tax equivalency is clear. A compromise to meet a Fee per acre However, the nonopen space real proper- payment obligation by a ty includes a number of classes of prop- simple administrative erty used for a wide range of purposes; method and for many of these there are no similar Since tax immunity is the expressed Con- commercial properties such as military gressional rationale given the greatest weight bases. for the programs we examilied, tax equivalency Second, the federal government's rela- is our preferred payment method. tionships with states and local govern- We are pleased that the Department of the In-. ments are different from those of a pri- terior concurs with our findings. In addition, vate owner of property. For example, it as a result of our report they have taken action has taxing powers, it provides for the to correct underpayments totaling $12.6 mil- common defense, and it maintains the lion and to recover overpayments of $1.1 mil- post offices and post roads. While the lion. Commission's staff study recognizes these factors, we would likely give them ACIR Staff Studies greater weight. Third, the degree to which any class of The ACIR has conducted two studies-one federal real property is an asset and con- of "open space" federal land which addresses tribution to a local government or is a lia- the same type of range, mineral, and timber bility and burden varies among classes, land we reviewed and a current study of from one time to another, and among dif- "nonopen space" federal real property which ferent parts of the country. The concern addresses the land and structures owned by the over military base closings and the federal government and used by it for such relocation of agency operations is an in- purposes as offices, bases, hospitals, airports, dication of some value to communities. Fourth, the Commission's staff study sug- authorizing legislation and that the gests consideration of the concept that amounts to be paid be subject to positive local authorities should have the "right" action by the appropriations committees to tax federally owned real property. The of the Congress. effect of this approach would be to create another entitlement, or mandatory pro- Although we may differ on the approach to gram over which the Congress would be taken on the various land programs, we do have no financial control. In short, the agree with the general message of the Commis- C states or local entitles would set federal sion's staff studies that substantial changes are expenditures by their taxing. We believe needed in the "patchwork" of existing policies it is the Congress that should determine and programs. We share your concern and will whether such payments are warranted support efforts to rationalize and streamline and at what financial level. We prefer the programs and the necessary intergovern- that the program rationale and the meth- mental relationships. However, I believe this od of payment be stated explicitly in will be a difficult undertaking.

STATEMENT OF tablished on the outskirts of Portsmouth in 1767, just 15 years after the city was settled. RICHARD J. DAVIS Through the years, Portsmouth has grown both in population and, as a result of several MAYOR OF PORTSMOUTH, VA annexations, in land area. Today the city contains 30 square miles of land and about 100,000 people. Future growth in the area is not possible, because Portsmouth is surrounded on all Myname is Richard J. Davis, and I am the sides by water or by other incorporated munic- Mayor of Portsmouth, VA. I am here today to ipalities. speak on behalf of Portsmouth and many other I quote these statistics only to point out to local governments on the subject of the federal you that Portsmouth is a compact, densely de- government's responsibility for land owner- veloped community. There are only 1,300 acres ship. of undeveloped land remaining, and most of We are delighted that the study on the sub- that is land which has already been committed ject of payments in lieu of taxes has been com- to housing or industrial development or pleted. The federal government has extensive redevelopment. The remaining vacant land land holdings throughout the nation. While the consists mainly of small scattered individual concentration of this ownership varies widely, lots. Thus, not only is growth in land area in some communities the federal government barred, but growth within the existing city may be the dominant landholder. With few ex- limits is severely limited. ceptions, however, no tax equivalency pay- Portsmouth is a typical core city with all the ments are made to the communities in which attendant problems associated with such cities this land is located. In many cases, including nationwide. ours, this creates a severe hardship on the host These problems include a restricted tax base community. and a relatively poor population. The 1970 cen- For background information, I want to ac- sus shows Portsmouth to have a larger percent- quaint you with some facts about Portsmouth, age of persons living in poverty, fewer high and how they relate to this subject. school graduates, more elderly, and so on. This Portsmouth is an older, seaport city settled in is not to say that we have stood idly by and 1752 and incorporated in 1858. The city has helplessly watched these developments. We been associated with the shipbuilding and ship have undertaken an ambitious program of re- repairing industry and with other maritime ac- newal, housing conservation, and industrial tivities since its earliest days. The Norfolk diversification designed to insure that Ports- Naval Shipyard, oldest in the nation, was es- mouth remains a viable, forward looking community. Without going into detail, I will just economy, and the attempts by the city to ex- point out that most of our community develop- pand its tax base. It is when one examines the ment funds have gone toward rebuilding two of value of tax exempt property in Portsmouth, the most blighted communities in the city, pri- however, that the real impact of the federal marily for their residents. We have attracted presence becomes apparent. Total value of all private developers to build middle to upper land and improvements in Portsmouth is $2.3 income housing on our downtown waterfront billion. Nearly $1.3 billion, or 54.7% of this, is to reverse the migration of middle and upper tax exempt or tax immune. More than 80% of income residents to neighboring suburban the tax exempt or tax immune property is communities. All of these efforts, combined owned by the federal government. The ratio of with the vigorous pursuit of industry to help tax exempt and immune property is compara- expand our tax base, will help ease the finan- ble to that of Washington, DC, where the feder- cial burden we face. al presence is, of course, better known. I have already made reference to the fact that Federal impact aid to the City of Portsmouth Portsmouth's land area is quite small, com- has totaled as follows for the preceding four pared to the other tidewater localities. Exacer- years: bating this difficulty is the high percentage of 1976-$760,190 land held by tax exempt entities, particularly 1977-$1,057,359 the federal government. 1978-$1,043,381 Portsmouth's corporate limits include 29,141 1979-$946,512 acres (45.5 square miles) of land and water, of 1980-$1,217,000 (estimated) which 19,181 acres (30 sq. miles) are land area. As you can see, the payments, although Total Navy land holdings are 1,840 acres, needed and very much appreciated, do not comprising the naval shipyard, Craney Island equal the estimated tax revenues we would re- fuel depot, naval hospital, and New Gosport ceive if federal property were taxed. and Stanley Court housing. The Coast Guard The City of Portsmouth has, for the past sev- base is an additional 187 acres. The total 2,027 eral years, initiated and supported national rec- acres is 11% of the city's land area. ognition of federally impacted communities In addition to these holdings is the Craney and the problems resulting from the loss of rev- Island landfill, operated by the Army Corps of enue. Your report more than adequately out- Engineers to store dredge material collected lines the problems, and we are grateful to all from the area's shipping channels. The total who made it possible. site, including water, is 6,900 acres, of which The federal payment to Washington for fiscal about 2,560 is fill area. The city has worked ex- year 1979, as authorized by P. L. 93-198, was tensively in recent years to secure title to the $317 million, or 25% of all sources of revenue. landfill when the Army finished its work there. Portsmouth, with a higher percentage value of The land gained by the city would be used to federally owned property, received for further help its industrial diversification pro- 1978-79 an estimated $1,043,381 in impact gram aimed at increasing the tax base, jobs, funds for its school system. This amounts to and public services. l.6'/0 of Portsmouth's general fund. If Ports- Eleven percent of any community's corporate mouth were allowed to tax federally owned area is a significant holding, particularly in a property at' the $1.24 per hundred dollars of city like Portsmouth where land is at a premi- valuation that applies to nonexempt property, um. Even more significant, however, is the lo- approximately $13,800,000 would be received cation of this land. With the exception of the by the city each year. 70 acres comprising the two Navy housing The Washington case is not the only prece- projects, all of the government holdings are on dent which can be cited in favor of a national waterfront land, constituting 65% of the city's payment in lieu program. Following the pas- prime industrial property. This land is among sage of P.L. 94-565-which provides for pay- the most valuable in the entire city, especially ment in lieu of taxes to local jurisdictions considering the port and port-related activities which contain National Park Service, National which contribute so heavily to Portsmouth's Forest, and Bureau of Land Management lands, and an amendment to this law which adds in- fully integrated into the local economy. active military lands and certain parks to the Since national defense benefits all Ameri- payment in lieu program-we have urged leg- cans, we feel that a reasonable payment in lieu islation to partially compensate local govern- program is not unfair. After all, the city pro- ments for the tax immunity which is suffered vides water to the shipyard and hospital for by them. In addition, The Refuge Revenue which it is, of course, paid, although at a re- Sharing Act of 1978 (P. L. 95-469), makes sim- duced rate. We have a mutual aid agreement ilar payments for certain wildlife refuge areas. with the shipyard and hospital fire depart- If payments are justifiable in rural areas and ments. Police, particularly traffic-related ser- in Washington, DC, they are also justifiable in vices, are necessary for the commuters. Possi- our nation's cities, which, for the most part, bly most expensive of all is construction of have proportionally greater problems and highways to accommodate morning and eve- fewer resources to deal with those problems. ning peak traffic loads. I want to emphasize at this point that we in Given the situation as I have described it in Portsmouth are not critical of the military pres- Portsmouth, and-given the fact that in Virginia ence in our city. We realize there are many the real estate tax is~ourbasic source of reve- benefits which we enjoy because of their .pres- nue, this is why we have so strongly supported ence. Cooperation between city and Navy has a national payment in lieu of taxes program for been exemplary in many instances. We would federally owned property within jurisdictions be the poorer were they not located in Tidewa- containing such property. ter and in Portsmouth. It is our feeling that your study has been a Even some of the positive impacts are miti- vital step in this direction, arid has laid a gated, however, by the tax-free nature of feder- strong foundation for assistance to cities with al installations. For example, many millions of federal property. We urge that the recommen- dollars worth of retail sales take place at the dations contained therein be reviewed and shipyard every year, denying Portsmouth the adopted, so that an equitable payments in lieu revenues from business licenses and sales taxes program can be developed as soon as possible. that would be generated if these facilities were We believe that the precedent is there to do so.

McCullough established the principle of im- STATEMENT OF munity, and it would appear that the issue JERRY K. EMRICH should be addressed on the basis of that principle. If the principle is not valid today, immuni- COUNTY ATTORNEY, ty with regard to nondiscriminatory taxation should be abolished in the interests of federal- ARLINGTON COUNTY, VA ism. After the McCullough decision, the immunity doctrine was applied and extended by the Theproposal of payments in lieu of taxes for federal courts in a very mechanical way for federal real property is a logical next step in about 120 years, with the result that states the 43-year progression of judicial and legisla- could not tax federal employees, sales taxes tive relaxation of federal government immunity could not be imposed on those selling to the from state and local taxes. The beginning of the federal government, and state income tax could immunity was the 1819 decision of the United not be levied on rents received from property States Supreme Court in the case of McCul- leased to the United States. The courts in these lough vs. Maryland. The purpose of creating cases lost sight of the purpose of McCullough the immunity at that time was to prevent which was the prevention of undue interfer- undue interference with the federal govern- ence, not the prevention of any economic bur- ment by state and local governments; however, den. the Court observed that nondiscriminatory Beginning in 1937, the Supreme Court began taxes were acceptable. reversing its position, and ruled in a series of cases that state and local taxes could be imposed directly on the federal government. It is posed on the gross receipts of contractors deal- possible that the Supreme Court, in the right ing with the federal government, the salaries of case, will also abolish this immunity, since federal employees, and even the use of federal such action would be a natural extension of government property by private parties. what had occurred during the prior 43 years. In one of the most recent cases, the Supreme Local taxes on real property are taxes that Court held that a local government could tax would be imposed directly on the federal gov- the possessory interest of federal employees in ernment, and therefore would be prohibited federally owned housing in which the employ- under current judicial decisions absent Con- ees were living for the convenience of the gov- gressional action. There would appear to be no ernment. The Court recognized that these taxes substantial reason why Congress should not were passed on to the federal government and act. Real property taxes in almost every state, if increased the total cost of government, but it not all, require uniformity of assessment found such a result nothing more than "the among members of each class of property. In normal incident of the organization within the addition to state provisions, it would be simple same territory of two governments, each pos- enough for Congress to include uniformity pro- sessing the taxing power." visions in its legislation. The requirement of All of the state and local taxes which have uniformity would act as a deterrent to unequal been paid as a result of these court decisions assessment of federal property. While there have, no doubt, added billions of dollars a year would be problems in determining the value of to the federal budget. These changes in the im- certain federal property, the problems would munity rules have occurred as a result of re- be of the same type as those which have been viewing the original principle of implied feder- faced by assessors for many years with regard al immunity and determining that it was no to specialized private property. longer an appropriate principle. Significantly, the Court rejected the principle without The federal courts would be the appropriate consideration of the need of a particular state forum in which the federal government could or local government. The changes occurred as a challenge the validity of assessments. It is not result of recognition by the Supreme Court of likely that there would be a flood of this type of the proper intergovernmental relationships in a litigation, because experience has indicated system of federalism. that specialized property assessments are not Congress has also acted to eliminate Congres- often litigated. This is probably the result of sionally created tax immunity. In 1953, it abol- many factors, not the least of which is the cost ished the previously created immunity of the of litigation for both the assessing authority AEC, because it recognized the appropriate po- and the property owner. sition of the federal government in our system Congressional recognition and adoption of of federalism. the judicial trend in federal tax immunity as it There remains an element of implied immu- applies to real property is entirely appropriate nity, which is the immunity from taxes im- at this time.

a US. GOVERNMENT PRINTING OFFICE: 1981-341-857:1005

COMMISSION MEMBERS

Private Citizens Abraham D. Beame, ACIR Chairman, New York, New York Bill G. King, Alabama Mary Eleanor Wall, Illinois

Members of the United States Senate Lawton Chiles, Florida William V. Roth, Jr., Delaware James R. Sasser, Tennessee

Members of the U.S. House of Representatives Clarence J. Brown, Jr., Ohio L. H. Fountain, North Carolina Charles B. Rangel, New York

Officers of the Executive Branch, Federal Government Moon Landrieu, Secretary, Department of Housing and Urban Development James T. McIntyre, Director, Office of Management and Budget G. William Miller, Secretary, Department of the Treasury

Governors Bruce Babbitt, Arizona John N. Dalton, Virginia Richard W. Riley, South Carolina Richard A. Snelling, Vermont

Mayors Thomas Bradley, Los Angeles, California Richard E. Carver, Peoria, Illinois Tom Moody, Columbus, Ohio John P. Rousakis, Savannah, Georgia

State Legislative Leaders Fred E. Anderson, President, Colorado State Senate Jason Boe, President, Oregon State Senate Leo McCarthy, Speaker, California Assembly

Elected County Officials William 0.Beach, County Executive, Montgomery County, Tennessee Lynn G. Cutler, ACIR Vice-Chair, Board of Supervisors, Black Hawk County, Iowa Doris W. Dealaman, Freeholder Director, Somerset County, New Jersey